IRVINE, CA—Advice on weathering the next investment cycle was what Shaun Riley, senior managing director at Faris Lee Investments, discussed earlier this year. And that advice made sense, what with cap rate compression and international and domestic monetary uncertainty weighing heavily on the sector. We caught up with Riley EXCLUSIVELY leading up to the ICSC Western Conference and Deal Making event to get his read on the current global and US retail conditions to see if this reality changed.
GlobeSt.com: Does the current global economic environment have an impact on retail real estate in the US?
Shaun Riley: We have yet to see the long-term effects of the current global economic environment on retail real estate but short-term effects have mostly been centered around lowered interest rates. With the 10-year Treasury yield recently hitting an all-time low, we have seen lenders aggressively quoting interest rates in the 3.75%-4.00% range for seven- to 10-year fixed rate loans with some lenders offering interest only terms for the first five years if the real estate is really well positioned. We have all known for some time that interest rates have been in a historically low range but the recent quotes we’ve been seeing are redefining investors’ expectations. Because of this, I believe we are in a window of time where investors can make sense of valuations that wouldn’t have worked three months ago. Though on-market inventory levels are higher than last year at this time, the current lending environment will help the transaction momentum.
GlobeSt.com: How does the current state of the local US economy have an impact on retail?
Riley: The US economy continues to bode well for the retailing industry as a whole. Consumer confidence figures have been strong, along with employment levels and new housing starts. The price of oil is at its lowest level in over six years – that combined with the recent jump in home mortgage refinancing – will put more discretionary income in the wallets of American consumers. Of course, there will always be some bumps along the way with retailers, as we saw Starbucks and several other large retailers missing their earnings targets for second quarter 2016.
GlobeSt.com: When it comes to new development, what types of retailers and brands are being sought after by developers and why?
Riley: We’re seeing developers and retailers shift to meet the needs of a changing consumer base and their spending habits. Quick-serve food concepts like Panera Bread, Starbucks, Pieology, The Habit, Dunkin Donuts, Moe’s Southwestern Grill, and others, are some of the more common brands and uses sought after by developers. The search for anchor tenants continues to be primarily geared around value-oriented retailers as they have been the most active players. Brands like Smart & Final, Aldi, Nordstrom Rack, Grocery Outlet, and Save A Lot, to name a few, have been back-filling previously vacant anchor spaces. We are also seeing developers begin to incorporate more medical uses into their projects. Uses like urgent care clinics, dialysis treatment centers, and even veterinarian clinics are beginning to find occupancy opportunities within traditional retail centers.
GlobeSt.com: What is the state of the Southern California retail market now, and how do you think it will change over the next 12 months?
Riley: The Southern California investment retail market continues to be very active. Despite the higher level of inventory, sales transactions thus far in 2016 are on pace with 2015 transaction figures. There are a broad range of investors whether institutional, private REITs or funds, individual/family trust, or offshore capital, that are all seeking yield because it’s difficult to find with alternative investments. While the true value-added opportunities are challenging to find, investors are still attracted to the yield obtainable in today’s market. Given the fact that interest rates are at historic lows and the likelihood of future increases in the Federal Funds Rate being more modest than initially anticipated, I see the market being stable well into 2017.