An inside look at the four main factors driving competition and how it will affect the industry this year.
Competition for core, stabilized shopping centers in the U.S. has typically been stiff, and it's easy to see why. These centers are well-leased by strong tenants and have a sturdy anchor tenant — usually a grocer or other major retailer. As a result, these centers are usually very stable and generate strong sales for tenants.
In recent quarters, competition for these assets has been more than stiff, however. It's grown fierce. Many REITs, pension fund advisors, and international investors are jockeying for core, stabilized shopping centers on the heels of the economic rebound and the resulting increases in capital availability. What's more, prime targets have been the top 30 MSAs in the country.
Here's a look at the factors driving this competition, and how we see the competition playing out for the industry and Kimco in 2013.
Factors driving competition
There are a number of primary factors that are strengthening competition for core, stabilized shopping centers. A few of the biggest ones are:
Retailers are re-focusing on urban locations. Before the Great Recession, many retailers were opening in rural markets and anticipating the population would come with them. However, when we hit a snag in the economy and housing growth diminished, many of these retailers began re-focusing on urban locations in the top MSAs. Some recently announced store openings industry-wide have been in the Boston, Dallas, New York, Miami, and Houston markets. Within the Kimco portfolio, some of the latest openings have been in the Los Angeles and San Diego markets, where Kimco KEYS tenants Comic Book Hideout and Bella by Krys Day Spa have launched.
Investors are seeking quality and safety. Although this is often the case in general, it's especially true for more investors as retail emerges from the recession. We're seeing investors re-embracing the quality and safety of top MSAs, where populations are denser, incomes are higher, employment is more stable, and retailers are opening shop. Manhattan saw the highest sales volume in 2012, at $4.4 billion, followed by Chicago ($3.6 billion) and Los Angeles ($3.4 billion), according to Real Capital Analytics.
Interest rates have remained low. Only very recently did Treasury 10-year note yields tick up to 2 percent (Jan. 28), the first time since last April. This signals the economy is getting healthier. Still, interest rates have remained low for years, which have helped fuel investors' aggressiveness because they gain buying power.
Pricing and cap rates are aggressive. Shopping center REITs have been particularly aggressive. In fact, prices paid by REITs in the fourth quarter last year averaged $220 per square foot, and cap rates compressed to 6.5 percent, according to Real Capital Analytics — the lowest since the third quarter of 2007. In strong core markets, we have even seen cap rates as low as the five to six percent range.
Moving forward this year, we'll continue to see an aggressive market for pricing and competition. Even with the election behind us and concerns over 2013 capital gains, there is still significantly more capital chasing deals than there is high-quality product to purchase.
In addition, interest rates will most likely vacillate around their current level in the near term. As a result, cap rates will also continue to stay low and might compress further.
We also predict buyers will have an increasingly tough time bidding on properties in the hottest markets, which would drive new investment in secondary markets. In our portfolio, for instance, we're seeing competition heat up in some secondary markets, such as Denver and Charlotte, for well-leased and well-located centers.
Primary markets, however, are also tops on our radar. Many of the MSAs that are experiencing the highest competition are also key targets for Kimco, including New York; Boston; Washington, D.C.; Miami; Atlanta; Chicago; and Houston, to name a few. We're planning to continue targeting these areas.
We'll also continue our efforts to build strong relationships with brokers and tenants, find new opportunities before they even hit the market, and keep our ears close to the ground — fundamentals that have rooted our business.
Core, stabilized shopping centers have been standout assets lately, and metrics are signaling continued investment activity into 2013. Such activity bodes well for the retail real estate market as it continues to firm up its footing.
This blog originally appeared on blog.kimcorealty.com. To read more articles from the company, click here.
— Ross Cooper is the vice president for Kimco's southern region. Kimco, a New Hyde Park, N.Y.-based REIT, has an interest in 896 centers that include 131 million square feet.