On a recent episode of the “Commercial Real Estate Show,” host Michael Bull and guests discussed the year in retail leasing and investment trends.
Michael BullRetail investment sales and leasing experienced an uptick in activity in 2013, a sign the slowly improving economy is finally trickling down to one of the sectors hit the hardest by the recession.
Retail investment sales in 2013 totaled approximately $60 billion, up seven percent year over year, according to Dan Fasulo, managing director of Real Capital Analytics. “Retail is not the best performing asset class, but certain segments of the market like strip centers outperformed in 2013,” he says.
A real sign of a healthy market is the diversity of participants acquiring properties, Fasulo says. “The retail market is seeing action from institutional investors, but also public and private REITs. Private buyers are back in a big way, partly fueled by CMBS resurgence.”
Yields for retail are still attractive versus other property sectors. Higher yields are going to continue to attract capital on the equity and debt side. “The real story in 2013 was the expansion of capital from primary markets to other places in the country and more challenging properties,” Fasulo says. “Many owners that have been waiting since the financial crisis should be in good shape this year.”
Cap rates compressed 20 to 30 basis points throughout the year. Nationwide, cap rates are about seven percent for core, Class A properties. In major markets, cap rates are as low as six percent. “It’s not the common view, but I think we’ll see some additional compression in 2014 in spite of a slightly higher rate environment,” Fasulo says.
Attracting Buyers
Given access to capital, now is a great time to execute a lease-up strategy and sell to institutional investors that are waiting for good assets, Fasulo says.
“This is a great time to consider selling stable assets. Retail is back in vogue,” John Harrison says, vice president of the National 
Dan FasuloRetail Group at Bull Realty. “During the cycle, cap rates on institutional-grade apartments have dropped, and cap rates on retail have been improving. We are seeing a lot of investors looking favorably at retail.”
When considering the sale of your property, timing is everything. If you have a partner, it’s important to include them in the decision to sell, Harrison says. Also consider your rent roll, remaining lease terms and capital stack, he added.
“If you have major tenants with two or three years remaining on their lease, it might not be the time to sell,” Harrison says. “Get to a point where you can renew their leases and then put the property on the market. If you have leases you can renew by assisting with tenant improvements, that can be money well spent.”
Creating a good first impression is important for attracting a good buyer, Harrison says. “Consider minor improvements, like resealing your parking lots, improving lighting and cleaning out your vacant spaces,” he said. “Don’t leave open-ended items that might make the buyer question how the property was maintained.”
When picking a broker look closely at how they actually market the property. “Do they just go to their database or do they also utilize other effective marketing techniques? Look to see if they cooperate with other brokers and if they offer part of their fee to buy-side agents,” Harrison says. “Value is affected by the law of supply and demand.”
John HarrisonAttracting Tenants
Maintaining an attractive property is important to not only selling the property, but also leasing it. “Having great curb appeal and an attractive façade is important to tenants looking for space,” Mez Birdie says, director of retail services with NAI Realvest.
The reputation of the landlord is also key for tenants. “Credibility is important because tenants want to know that the landlord will be around and do what they say they are going to do,” Birdie added.
Dollar store and discount retailers are still actively seeking space, according to Birdie. “The recession has caused shoppers to be more thrifty. High-end retailers and low-end retailers are still performing well. The middle-of-the-road department stores are struggling.”
Concessions are still available but have slowed down considerably, Birdie says. “As the economy improves, concessions are being pulled back. However, if you are a national tenant with a good balance sheet, you can still get good concessions.”.
— Michael Bull, CCIM, is the host of the nationally syndicated “Commercial Real Estate Show” and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta.