July 25, 2007

Written by Sasha M Pardy

Retail Property Sales Lose Steam in Q2

CoStar Reports: U.S. Shopping Center Sales Activity Slips in Second Quarter

Following up on last week's CoStar Advisor coverage on "surging U.S. office sales activity" -- which also highlighted a lagging retail investment market -- we take a closer look this week at the current retail sales dynamic.

Following are the overall statistics of sales in the shopping center category closed during second quarter (ended June 30, 2007). CoStar contacted several industry leaders to comment on this trend and to discuss some of the most exceptional deals of the second quarter.

U.S. Shopping Center Sales Activity
Tallying national shopping centers sales during the second quarter (15,000 square feet or larger), the market recorded $3.88 billion in sales volume, down 17% over last quarter and down 27% over second quarter 2006. Pricing hasn't changed significantly, with an average sale price of $144-per-square-foot down just 2% over last quarter, but up 8% over second quarter last year. Capitalization rates are slowly rising; 7.47% was the average for second quarter, which is up 10 basis points over last quarter and up 28 basis points over second quarter last year. And transaction activity is also on the decline; 359 transactions were recorded during second quarter, down 16% over last quarter and 32% over last year.

Michael Phillips, principal and founder of Phillips Edison, gave CoStar his opinion about what's going on in the retail market right now. "There's regional buyers and financial buyers; both generally use higher leverage ratios to acquire property. The financial buyers are generally groups that may have institutional or pension money, but are not direct operators - meaning they have third parties run their centers. The small/regional buyers are those that are direct operators trying to build their portfolios through partnerships or private equity. The rise in interest rates has made retail property margins very thin and those were the groups driving price. So, those buyers have receded and are not as active in the market as they have been in the past, causing a slowdown in sales volume."

Phillips also explained a virtual "gap" that exists in our statistics. "When volume comes down, it's typically not until four to six months later that we see a difference in price and caps moving with any significance, because that's the period of time a seller has to go through in testing the market through shopping the property. They won't lower prices until they're convinced the market has truly changed."

He agreed with our estimation that the average price-per-square-foot will probably show a decline over the next two quarters. Phillips did identify the Western states, due to their continued high growth, as more resilient than the rest of the country.

Martin Forster, a partner in the Pocklington, Pocklington & Forster Retail Investment Group of Cushman & Wakefield, one of Florida's leading retail investment brokerage teams, explained to CoStar the effect that rising cap rates and a fluctuating 10-year treasury yield has had on the retail investment marketplace.

He said sellers have seen a lot of "re-trades" occur.

"Say the buyer has agreed to a deal on the basis of a 7.5% cap rate with financing at 1.2 points over the 10-year; during due diligence the 10-year increases from 4.9% to 5.4%; suddenly the buyer is scraping its way up to the ceiling the lender is prepared to go and if the 10-year rises more, then the buyer has a shortfall. At that point, the buyer decides to make up that difference in cash or goes back to the seller asking them to decrease the price."

Forster did say he thinks this "bubble" in the 10-year has "eased a fraction."

Further commenting on the market's decline in activity, Forster said "I think many sellers have not yet come to terms with the reality that cap rates are rising. They still want the pricing of 12 months ago and buyers are pushing back. There's still an enormous amount of capital out there and those buyers are chasing deals -- however I do think sellers are seeing fewer buyers in the bidding process. Regardless, deals are still getting done it's not a problem."

Retail Property Sales Lose Steam in Q2

Send mail to Info@Lloyd-Westcord.com with questions or comments about this web site. Copyright © 2006 Lloyd Wertheimer Last modified: 09/23/08

Send mail to Info@Lloyd-Westcord.com with questions or comments about this web site.
Copyright © 2006 Lloyd Wertheimer
Last modified: 09/23/08