Bridging the Buyer/Seller Expectation Gap for Retail in 2016

NEW YORK CITY—Major consolidations among institutions and retailers have shaken up the retail sector, tightening yields for the investor looking for safe returns. Will this trend continue into the new year? met up withShaun Riley, senior managing director at Faris Lee Investments, to get his take on the overall health and prospects for the sector in advance of ICSC New York National Deal Making conference. How would you assess the market this past year?

Shaun Riley: From a valuation perspective, the market has been very strong and resilient to headwinds such as the potential for rising interest rates and the continual loan maturity on over-leveraged properties. Cap rates on a select group of quality single tenant investments in certain geographic areas have dipped below 4% with cap rate compression across the board in all retail product types. From a macro level the economy has continued to improve, with lower unemployment and consistently strong sales in such key categories as automobiles and homes. Although wages have been suppressed, people are working again which gives retail real estate investors confidence. Do you see investor perception changing going into 2016?

Riley: In the past few months we have begun to see a change in investor perception. For some time the environment has seen a lack of inventory and more money chasing fewer opportunities. However, we are beginning to see the pendulum shift as new development brings more opportunities to the market and opportunistic sellers of more mature and seasoned retail properties have also put offerings on the market. In many cases, instead of having several investors compete at or near a seller’s desired pricing as we saw early this year, there are still several investors competing, but many times only one is able to stretch to the valuation where a deal can be transacted. I think what we are experiencing now is an adjustment period where buyer and seller expectations will need to reconcile so that the transaction momentum in the market continues to stay strong. How are you advising your clients headed into 2016?

Riley: We are advising our clients to be more conservative in their projections. Instead of becoming caught up in a market where investors automatically project a sale cap rate of 25 basis points lower than what a comparable property just sold for, we are actually preparing them for the day when exit cap rates will be higher than today. This is a muscle that most investment brokers haven’t worked for awhile, however, we feel it is needed in this environment. Moving forward, adding value for our clients will need to be much more forward-thinking with creative strategies and not just dependent on cap rate compression. In what ways are you helping clients navigate through this market?

Riley: We are emphasizing to a greater degree what is important to investors. For example, we are reviewing leases before they are signed and advising an owner on aspects of the lease such as reporting of tenant sales and financials, relocation clauses, personal guarantee provisions, landlord obligations, and structuring of lease term and rent escalations. The more marketable we can make a property before a lease is signed, the more value we are creating for them. Any closing thoughts regarding how you see the market next year?

Riley: Generally speaking, I think we still have good momentum in the market and are not in for a major correction within the next year. Given the pricing environment, investors will have to work smarter to add value to their projects which will include reviewing all aspects of their property and extracting value from areas which have traditionally been overlooked.


Subscribe to receive news direct to your inbox.

Copyright © 2019 Faris Lee Investments