March 8, 2016
Connect Media recently caught up with CBRE investment broker Philip Voorhees to gain insights into the state of retail real estate. For more retail trends and news, attend Connect Retail West on March 16th at the Conga Room at LA Live.
1 – Why are we seeing so many soft good retailers closing?
At any given point in an economic cycle, companies will thrive and companies will fail. Soft goods retailers like Abercrombie & Fitch, Aeropostale, Gap, Guess, and Wet Seal seem not to be connecting with their formerly teen clients, the millennials, who are now adults and active in the workforce.
The influence of the millennial generation, a group that is seven million plus larger in size than the baby boom generation, will have a profound impact on retail over the coming decades. Millennials are discerning shoppers seeking experiences as much as products, and they demand quality and convenience.
2 – Are lenders pulling back as a result?
No, not really. The only shake up in the debt market is in Commercial Mortgage Backed Securities (CMBS) loans. CMBS spreads increased 50+ bps at summer’s end in 2015, as turmoil struck global capital markets and China, specifically. A second wave of instability hit as 2016 arrived along with Regulations A&B for CMBS securitization.
The result was the swift exodus of 10 CMBS makers from the market, with five to seven more expected to close in 2016. Despite an approximately 70 bps decrease in the 10-Year Treasury since Q2 2015, effective CMBS rates are up +150 bps. CMBS is an important segment of the debt market, and will be a big story throughout 2016.
3 – What’s ahead in 2016 for the retail sector?
With high current occupancy and a limited amount of new retail development underway, vacancy rates should continue downward, putting upward pressure on rents, particularly in the coastal markets of Orange County and Southern California. In premium locations, rents are perhaps 25-35% higher now than at the market peak of 2006-2007.
Moving to second tier markets, however, many asking rents remain below 2006-2007 peak levels. While fewer “mom and pop” retailers are in the market seeking space, we’re seeing a strong expansion of “fast casual” dining tenants. Concepts such as Pressed Juicery are posting truly remarkable sales on a per-square-foot basis.