Traffic Is Up, Business Meetings Are Up, Buyer Interest Is Up -- But Attendees Say There's Little High-Quality Product To Acquire
Improving market fundamentals and increase retail deal activity raised the energy level several notches at this year's RECon convention, the annual deal-making confab sponsored by the International Council of Shopping Centers (ICSC) in Las Vegas each spring.
More than 32,000 attendees -- including commercial real estate
leasing and investment brokers, developers, retailers, lenders and other shopping center professionals -- converged on Glitter City for the annual three-day event this week with a heightened sense of optimism about the improving market.
But the enthusiasm was tempered by a healthy dose of realism forged during several years of diminished activity, along with a recovery that's far weaker than the recovery following the previous down cycle a decade ago.
Greg Maloney, president and CEO of Jones Lang LaSalle Retail, said there’s no question there were more people than last year at the conference. But there are just few places for investors to park their cash.
"Activity is definitely up in our booth. There’s a very positive feeling going on here this year. People feel a lot better about things, even though they’re concerned about economic conditions," he said. "A lot of players out there are looking to expand and they have money and want to spend it on new product. But there’s no product available. There would be a lot more investment activity if there was product."
Regardless, Maloney said some people reported much more activity this year on the development front, albeit still at a very low level.
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"At least there’s some activity, which is very positive. Two years ago, there was virtually none."
"Compared to the past few years, there’s been a lot more of an upbeat enthusiasm about the market and the opportunities," added Phil Baxter, president, Stan Johnson Cos., a fast-growing investment brokerage specializing in single-tenant net lease properties nationwide. "It’s obviously still not like it was in the go-go years of 2006 and 2007. But we have about 50 brokers on the ground here and have scheduled in excess of 700 meetings. We’re busy and business is looking good."
"There’s been continued cautious optimism, a lot of positive will to do deals and more deals done year to date in 2012, but there’s a lot of uncertainty in the capital market s relative to Europe and how that affects our banks and lending institutions," said Dennis Vaccaro, senior managing director with Faris Lee Investments, a brokerage specializing in retail investment sales.
REITs have been very active for buying core and core-plus properties, the private markets are extremely active in the single tenant market.
"We are continuing to see a compression of cap rates for long-term net lease corporate-backed single tenant properties. In fact, in that category, we’ve returned to and in some cases exceeded 2007 pricing," Vaccaro said.
One major topic at the parties and receptions at the Las Vegas Convention Center and the hotel lounges was the lack of new development activity during this recovery, a trend cited in CoStar Group's First Quarter Retail Outlook and Forecast
last week. The dearth of new supply has resulted in a constrained environment for buyers as the existing supply of core retail assets is absorbed by tenants.
There’s consistent frustration and feedback about the lack of product available in the core and core-plus category, but that has not yet led to a dramatic increase in activity in the B and C and secondary markets.
Vaccaro said the conference has yielded more properties where construction is commencing or going to commence than at any time in the last three years.
"The development projects are all tenant-driven. The difference now versus three years ago is we’re now hearing about multi-tenant activity coming out of the ground, which has to be pretty much buttoned up before the first shovel goes in at 80+% preleased," Vaccaro said.
"It’s definitely a seller’s market and cap rates continue to fall," Baxter said.
He said development deals are starting to gain more traction and the supply in the pipeline is building -- not for Best Buy-type big boxes, but for smaller retail centers and drugstores.
The private buyers have been the most active and perhaps the most aggressive negotiators at the conference.
"There’s a lot of cash out there chasing opportunities, it’s a reflection of the supply and demand equation," Baxter said. "You have the private buyers and the institutions that are raising tons of capital and need to put those dollars to work."
Maloney said the gap between the asking and bid price is still a factor, particularly for the Class B and C assets.
"There’s no question it could be a seller’s market for core assets, but no one wants to sell because they can’t replace it," he said. "In the B class, there are owners who will sell it, but they want a certain price, and if they don’t get it they’re pulling it [from the market]. There’s still a spread between ask and bid, and the two groups are sometimes far apart."
While the increased availability of debt has been much discussed in the retail real estate industry in recent months, most of it is earmarked for Class A core properties, with a borrower lucky to get 50% or 60% loan-to-value for Class B and below, Maloney said.
"From a traffic, meetings and activity standpoint, the conference is over the top," Maloney said Tuesday. "But the fundamentals haven’t really changed in our business. We’re still in a situation where people are very cautious, there’s not a lot of stability."
"The retailers are talking about growth, but if you’re used to opening five stores and they’re now opening 10, everyone’s happy. In the hey-day, they were opening 100. So I wouldn’t go as far as to say we’re heading into great times. There’s still too much instability in the system."
"The trophy centers are still performing amazingly well, but in the B and C and unanchored strip centers with softer traffic count, we’re still having a tough time getting interest and leasing them out. Landlords are having to get more creative in terms of offering more incentives than they would like to get those spaces leased," said Terrison Quinn, associate vice president, retail with Colliers International , a tenant representation specialist.