IRVINE, CA—There are several factors that exemplify how today’s retail-investment market is fundamentally stronger than the 2007 market peak, Donald MacLellan, senior managing partner of Faris Lee Investments, tells GlobeSt.com. Below are five key factors that he believes distinguish this current investment environment from the frenzy in 2007—and should ultimately help safeguard retail property owners over the long-term.
- Preference for lower leverage: “Being conservative is the key,” says MacLellan. “Investors of all sizes are more conservative when it comes to borrowing. If buyers aren’t paying all-cash for a property—which is very common in the lower price point transactions—they are putting down 35% to 50% equity. This gives owners more security to weather a storm should a downturn happen again.” In addition, he says, investors’ goals are to put as much capital out as possible based on the limited opportunities to invest. “There continues to be an imbalance of demand vs. supply in retail investments; as such, there is a tremendous amount of pent-up capital. With many funds over-subscribed, it makes sense all around to put more cash down and borrow less.”
- Limited new development: From a retail-development standpoint across the country, development activity has been relatively nonexistent since the recession, says MacLellan. “The few properties that are being developed are driven by tenant demand in neighborhoods where daily-needs retail is in shortage.”The other factors limiting future development are rising construction costs as well as flat anchor rents, making development economically unfeasible, he adds. “This phenomenon is in essence making existing retail that much more valuable and fundamentally stronger than previous cycles.”
- Slowdown of large retailer bankruptcy and store closings: There have been a significant number of mid- to large-sized retailers shutting their doors over the past several years.Albertsons, Ralphs, and Fresh & Easy have all closed underperforming stores leaving their anchor spaces available, and Circuit City, Borders and Mervyns are also examples of big-box retailers that declared bankruptcy and closed their entire chains, leaving significant inventory of vacant big box spaces. MacLellan says, “It took several years; however, the majority of all of this space has been backfilled and released to new retailers expanding into California such as Hobby Lobby, Kohl’s, and Forever 21, as well as fitness operators like LA Fitness and 24-Hour Fitness.” Ultimately, retailers were forced to rethink, revitalize and re-strategize on how they relate to the customer as well as how they live in a world of online shopping, he adds. “The vacant space is now being occupied by retailers that are a good fit for the markets they enter, and that better meet consumer demand.”
- Fundamentally based rents: Pre-recession, rental rates for retailers were increasing at an unsustainable pace, says MacLellan. “Many went out of business or relocated to a more economical location during the downturn. The majority of today’s large national/regional big-box retailers are operating at rents much more in line with healthier occupancy ratios. In addition, there was a flushing out of weak in-line retail stores. Today, the small retail shops that remain are performing relatively well and are here for the long run. As retailers’ sales improve along with the economy, rents will roll as they always do, but retailers will be more prudent about negotiations based on location, sales, and long-term sustainability.”
- Location, location, location: Investors are now more focused on strong locations and credit-worthiness of the retailer, as opposed to previous cycles where less attention was paid to these two factors, MacLellan points out. “Strength of location is also important to retailers themselves, where we have seen retailers shed lower performing stores in inferior locations. We have seen investors do well both in the dense infill areas of core markets and the main-and-main locations in secondary trade areas. The key is to invest in centers well positioned in their respective retail markets.”