We are midway through 2015 and the market has continued to improve year over year. Between the low interest rate environment we are experiencing and the buyer pool growing faster than the available inventory, we are watching net-leased properties trade at all-time low cap rates. In addition, multi-tenant shopping center cap rates are continuing to compress from buyer competition. Although deal inventory on the market has grown, it is not keeping pace with the growing buyer pool to keep up with the demand. A perfect example of this is how we drove 9 offers in two weeks to close on downtown Tampa retail within 45 days, breaking a price per foot record at over $270 per square foot.
Why are buyers willing to pay a premium right now? There are a two major factors coming into play: Cheap debt and Out-of-Area capital. Lenders are looking to do deals, offering historically low interest rates, and competing with each other on terms to secure the business. There is also an influx of capital coming from other metro markets. In the past, the compression of returns in the southwest and central Florida markets lag behind major metros like New York, California, and even other Florida metros like booming Miami. Buyers in those other markets, as well as international buyers from Canada, Brazil, and Asia are paying prices local buyers would rarely consider paying because they are focused on the return as it compares to returns in their home markets as well as the future value of the real estate. If you’re in the market to sell and you are not accessing these out of area buyers, you are leaving significant money on the table.
If you are not selling in the net-leased world right now, then what are you doing? Even business owners are taking advantage of the seller’s market by executing sale-leasebacks on the real estate they own and accessing their equity to expand their businesses into additional locations. Prices for multi-tenant retail also continue to climb as vacancies are filling and properties are stabilizing. Across the US, there has been a 26 percent increase in absorption, which has netted a 50 basis point decrease in vacancy to 6.6 percent. That is the largest decline we have seen in 14 years. The other good news is, there still appears to be upside in rents moving forward and that is what buyers are banking on. At a National average of $18.68 per square foot, the average asking rent for single-tenant properties remains 8.1 percent below peak, while the average for multi-tenant properties, at $16.64 per square foot, lags peak rents by 12 percent.
If you haven’t considered selling, now is a great time to analyze your options. Many clients are taking advantage of this hot market to sell the black sheep of their portfolio for an asset in a better location, trading up from a middle block to a corner block, or mitigating risk on a short term lease for the stability of a longer term lease without foregoing a large spread in their return. If interest rates climb or if deal inventory catches up to the demand, values will decline. No one has a crystal ball to see the future, but it is safe to say that interest rates are going to go up before they go any lower and, with $300 billion in CMBS debt coming due in the next two years, we can see an influx of deal inventory on the horizon. Whether you are planning to hold through the next cycle or develop an exit strategy to beat the next supply/demand shift in the market, it is time to evaluate your options and develop a pro-active approach to managing your retail investments.
For more information regarding the market or for a more detailed analysis of your situation in particular, give us a call at 813-387-4796
James T. Garner
National Retail Group
License: FL: SL3273659
Direct: (813) 387-4796
Fax: (813) 387-4710