Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/818922
www.REBusinessOnline.com Western Real Estate Business • May 2017 • 67 SHOPPING FOR SUCCESS high tenant sales performance. This is due to high occupancy levels, strong rents, low cap rates and attractive lev- eraged cash-on-cash yields. This "quality" focused subset of the larger retail strip center world has seen cap rates remain stable. This is in light of a higher interest rate envi- ronment where the 10-Year Treasury moved upward as much as 70 basis points since the November 2016 presi- dential election and about 40 basis points currently. In some cases, cap rates even compressed to the tune of 10 to 20 basis points. How- ever, not every retail strip center is equal in quality or funda- mentals. The buyer pool for these as- sets has also become more discerning in targeting acquisitions. This has caused the cap rate spread to widen between what the market deems "best" and those that are "less than best." This spread likely reached its narrowest margin in 2015. It has since widened by 30 to 70 basis points, depending on a number of property- and market- related factors. Many Southern California retail strip center transactions point to this trend of compressing cap rates for the "best" assets. CBRE's National Retail Partners-West team recently sold two newly built retail strip center pads at the Shops I and II on Gladstone in San Dimas, California, to a high-per- forming Costco. Each center is leased to well-known national and regional food operators, including Panera Bread, Five Guys, Dickey's, Café Rio, Krispy Kreme, Jimmy John's, Nekter and Waba Grill. After generating mul- tiple offers priced together and sepa- rately, these assets sold to one buyer for more than $16 million ($860 per square foot), representing a 5.23 per- cent cap rate, which was above list pricing. Other segments of the retail strip center market have also experienced similar low cap rates and high price- per-square-foot sales. While brand recognition and tenant familiarity are important, the timeless real estate ad- ages of focusing on foot-traffic genera- tion and location remain paramount considerations for investors. This is particularly true when it's an older property and/or the majority of the occupancy isn't credit or brand-name tenancy. National convenience store operators like 7-Eleven continue to be a staple within many retail strip centers. Aside from national food and beverage op- erators, corporate convenience stores are one of the preferred retail strip cen- ter anchors. This is because they have the ability to drive traffic into a center, proven business models and financial strength. In the smaller price-point re- tail strip center world, these assets ex- perience strong pricing and activity as witnessed by two 7-Eleven-anchored strip centers our NRP-West team re- cently sold. This includes Olympic Pla- za in Los Angeles for $3.4 million ($772 per square foot), representing a 5.26 percent cap rate, and Main Street Com- mercial in Santa Ana for $5.05 million ($600 per square foot), representing a 5.1 percent cap rate. Deal size and national brand occu- pancy aside, well-located unanchored retail centers in infill and coastal Southern California markets with sea- soned or high-performing local and regional tenancy also see strong pric- ing and demand. CBRE's recent sales of Tozai Plaza and BeachWalk are ex- cellent examples, even with a two-sto- ry component at each property. Tozai Plaza, an Asian-tenant-oriented center in Gardena, California, sold for $19.15 million ($487 per square foot), repre- senting a 5.27 percent cap rate. Beach- Walk, a coastal center steps from the sand in the San Diego submarket of Solana Beach sold for $33.25 million ($604 per square foot), in the mid-to- high 5 percent cap rate range. According to Real Capital Analyt- ics' data, the average sale price per square foot in the first quarter of 2017 for strip centers in the Los Angeles, Orange County and San Diego trade areas exceeded the $256 per square foot average for the six major metro- politan areas. Los Angeles came in at $262 per square foot, Orange County at $373 per square foot and San Diego at $395 per square foot. While the In- land Empire (at $200 per square foot) lagged behind the six major metro- politan areas, its average cap rate was lower, at 6 percent compared to 6.1 percent. For the same time period, the average cap rates for Los Angeles, Orange County and San Diego were at 5.8 percent, 5.1 percent and 5.8 per- cent, respectively. There are many positives to point to within retail in light of any broader negative press about the sector. With- out tenant confidence, activity and expansion, the market wouldn't have new retail developments and well- leased retail properties. And without these properties, investors wouldn't have the ability, nor the confidence to buy these assets near record pric- ing. Retail will continue to evolve just as all things do. As investors look to navigate this retail evolution, it is im- portant to go back to the basics: look at which assets appeal to the deep- est tenant pool with the highest rents driven by the property's location, scalable configuration and co-tenancy. Retail strip centers have and will con- tinue to fit this mold, keeping pricing and demand stable in the short and long term. Stay positive, America! Retail is here to stay and strip centers will lead the charge. DEPARTMENT STORE FALLOUT LEADS TO OPPORTUNITY...FOR SOME By Joseph Williams, Senior Vice President, the Woodmont Company It's no secret that retail is evolving and brick-and-mor- tar stores are closing at a pace we have not seen in recent history. There are virtually no retailers in the country to- day that are not re- valuating their store base, both from a scale and relevance perspective. Over the past 15 years, retail store growth has outpaced population growth nearly four times over and, thus, we are without question over-stored for retail. As a result, the store closures will continue as retailers, especially de- partment stores, continue to right-size their store fleets. Department stores were one of the strongest catalysts of retail growth across the industry for many years. Unfortunately, depart- ment stores have lost their stature as the once-dominant force in retail as consumer trends have shifted and smaller, more nimble competitors have emerged. As retailers such as Kmart, Sears, JCPenney, and Macy's continue to shutter stores, retail va- cancies will continue to rise and the competitive landscape for replace- ment tenants will only grow exponen- tially. All landlords, developers, brokers and municipalities are wondering who will be the next evolution of us- ers that will backfill the mounting stock of available retail space. In part, the answer may very well be no one. In order to return to a sustainable, healthy base of retail in our country, a not-inconsequential amount of re- tail needs to be permanently decom- missioned. For the former depart- ment stores that still remain in viable communities in fundamentally well- located real estate, these boxes will continue to operate as retail with the next generation of retailers backfill- ing the spaces. The current retail- ers that are most actively backfilling department stores are the discount retailers like TJMaxx, Marshalls, HomeGoods, Ross and Burlington SHOPPING from page 1 CBRE's National Retail Partners-West team recently sold two newly built strip center pads at the Shops I and II on Gladstone in San Dimas, Calif., to a high-performing Costco. Olympic Plaza is a 7-Eleven-anchored s trip center in Los Angeles. Read Williams Tozai Plaza, an Asian-tenant-oriented center in Gardena, Calif., sold for $19.15 million, representing a 5.27 percent cap rate.