Single-Tenant QSRs Lead Retail Development

IRVINE, CA—Retail development is improving, but at a pace nowhere near the level of seven to 10 years ago, Shaun Riley, senior managing director of Faris Lee Investments, tells exclusively. In advance of ICSC Western Division next month, we spoke with Riley about trends he’s seeing in the retail market. As 2014 is coming to its final stretch, how has the investment market fared so far this year?
Riley: The market continues to have good momentum heading into the fourth quarter. There continues to be a considerable amount of capital both from institutional and private investors pursuing a shallow level of inventory. On comparable offerings, we are seeing stronger investor interest than we did last year at this time, which is translating into competitive bidding for each asset and further cap-rate compression for sellers. Are there any other driving forces you are seeing in the market?
Riley: There is an increased appetite from Chinese investors pulling money out of China and investing in commercial real estate here in the US, with Southern California being a primary area of focus. Just recently, Faris Lee has had several assets go into escrow with all-cash investors from China. The investment sweet spot for these buyers seems to be in the $5-million to $15-million price range. What is happening on the development side?
Riley: Development prospects continue to improve, but at a slow pace. Development is happening in key locations, but we have not seen anywhere near the momentum experienced seven to 10 years ago. Most of the development we are seeing is confined to either ground-up development of single-tenant quick-serve restaurants or repositioning/redevelopment of existing vacant projects. Tell me about the retailers—how are they faring?
Riley: The discount and luxury segments of the retail market have been seeing the most growth. Other than that, overall there has been no sustainable growth with the majority of retailers that fall into the middle-tier retailer category. For the balance of 2014 and moving into 2015, what should investors keep in mind?
Riley: Allow time to take some perspective on where we’ve been and where we are now. It wasn’t too long ago when we saw property values significantly affected due to severe economic forces. Though values have really improved, there are still market conditions that are causing some concern. Primarily, the housing market has slowed, and inventory of existing homes has increased.
Robust sales of existing homes promote retail sales and stimulate new-home development, which also is a major driver of sales and retail expansion. If the slowdown continues, retail will be negatively affected. Additionally, geopolitical events are more front-and-center now than at any time in the past several years.
On a positive note, there are assets in virtually every investor’s portfolio where values have peaked and current market conditions allow an owner to maximize investment returns while taking downside risk off the table.


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