Overall Market Data
Retail Property Sales Register Consistent Decline, Shopping Center Sales Drop-Off Dramatically
CoStar Reports on Retail Property Sales Statistics, Capital Market Trends and Outlooks, Executive Opinions and Expectations, and more…
Last week, CoStar Advisor reported on major trends in vacancy, rental rates and construction activity in retail real estate from the Third Quarter 2008 National Retail Report. This week, we turn our attention to retail property sales and overall capital market trends identified in the CoStar report, as well as recent reports issued by Cushman & Wakefield, Jones Lang LaSalle (”JLL”), the International Council of Shopping Centers (”ICSC”) and The Urban Land Institute (”ULI”)/PricewaterhouseCoopers.
Overall Retail Property Sale Statistics
In the National Retail Report, CoStar tallied sales of retail buildings 15,000 square feet or larger that occurred during second quarter 2008. (CoStar reports quarterly sales statistics one quarter later than a quarter’s close date to maximize accuracy and ensure that the information reflects a high percentage of deed records on closed sale transactions that may not have been made public.)
During second quarter, CoStar tracked 350 closed sale transactions of retail property for a total sales volume of $2.62 billion. In comparison to first quarter 2008, 17.8% fewer transactions closed and sales volume was down about 35.2%.
All told, 776 retail property sales closed during the first half of 2008 for a total sales volume of $6.67 billion. In comparison to the first half of 2007, 40.6% fewer transactions closed and sales volume was down about 48.9%.
The average retail building sold for $154.30 per square foot during second quarter, down 16.7% from average price paid for retail property during the first quarter. During the first half of 2008, the retail buildings sold for an average price of $171.67 per square foot, surprisingly 5.6% higher than the average price per square foot for the first half of 2007.
A continued decline in the average capitalization rate for retail property sales continues to tighten the margins investors realize. During the first half of 2008, the average retail cap rate was 6.53%, which compares to 6.78% during the same period in 2007.
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CoStar’s Third Quarter 2008 National Retail Market Report, which provides comprehensive statistics for national and local retail real estate trends, is now available to subscribers under the Analytics / Market Reports headline on the CoStar Control Panel. For non-subscribers, the report can be purchased now via CoStar’s Yahoo Store for a reduced price by following this link.
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Shopping Center Sale Statistics
According to a current search of CoStar COMPs data for sales of shopping centers 15,000 square feet or larger, 82 transactions closed during second quarter 2008 for an aggregate sales volume of $538.14 million. The average price per square foot was $108.91 and the average seller’s cap rate was 7.45%. In comparison to first quarter 2008, 21% fewer transactions closed and sales volume was down nearly 18% while the average price per square foot was surprisingly up about 16%.
Second quarter 2008 shopping center sales activity was down drastically in comparison to the same period in 2007. Specifically, 81% less transactions closed, total sales volume was down about 89%, and the average sale price per square foot was down nearly 28%. Interestingly, the average seller’s cap rate was exactly the same — 7.45%.
With the understanding that not all sales data is in yet for the third quarter of 2008, all signs are pointing to a significant drop-off in activity from previous quarters. Only 41 sales of shopping centers 15,000 square feet or larger have been recorded as closed during third quarter, for a total sales volume of only $206.4 million, an average price per square foot of $99.42, and an average seller’s cap rate of nearly 7.6%.
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Brokerage Houses’ Views
JLL’s Manhattan Capital Markets Group, which includes Thomas Beneville, Nathaniel Rockett and Peter DeCheser, wrote in a Market Update report released earlier this month, “Availability of debt was the primary issue at the outset of the quarter, over which was layered a radical change in forecasts for the health of the leasing market, and a corresponding shift in risk pricing at the end of the quarter. The takeover of Fannie Mae and Freddie Mac, followed by the bankruptcy of Lehman Brothers, the sale of Merrill Lynch, the rescue of AIG, the failure of Washington Mutual and the apparently distressed sale of Wachovia, produced an understandable negative shift in underwriting of market leasing assumptions and higher return requirements.”
JLL went on to point out that while transaction activity is down significantly, it still does not reflect the “on the ground feel” the industry is experiencing, “as most of the deals recorded during this time were made much earlier.”
“Rather than narrowing as more information flows into the market, the bid/ask spread appears to be widening even further as buyers increasingly worry about trying to ‘catch a falling knife.’ In addition to concerns about the health of the market, would-be buyers feel that there will be many opportunities in the new year…and prefer to keep their money in the bank while they wait on forced sales that result. In short, the market is just beginning to come to grips with the full scale and extent of the problems to be solved and will not begin to move forward again until participants feel comfortable that they know where things stand,” said JLL in the report.
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Cushman & Wakefield wrote earlier this month in report titled Financial Industry Crisis: An End in Sight?, “Already sales have fallen [drastically] in volume from a year ago and prices have declined. While it is difficult to get an accurate reading on the investment market because of the small number of transactions, prices are down and cap rates are up, and real estate capital and risk have been fundamentally re-priced for the foreseeable future. What impact this will have on long-term allocation to the sector remains to be seen, but in the meantime we expect to see further price adjustment and cap rate increases.”
Joseph Harbert, chief operating officer of Cushman & Wakefield’s New York Metro Region pointed out in a recent press release addressing third quarter statistics that many deals closed this year have been facilitated by seller financing or loan assumptions. “This is key, as credit is sparse, particularly for larger deals,” said Mr. Harbert. “The tightness in the debt market, combined with the recent financial sector difficulty, has slowed sales volume further in the past few months,” he added.
Harbert says that investors are currently seeking to buy property with strong occupancy and little rollover risk over the next few years. “There has been abundant capital raised for deals, but much of this capital is still on the sidelines, waiting for better opportunities,” said Mr. Harbert. “When investors perceive the market has stabilized, we expect a surge of capital chasing deals.”
“The global economy is going through one of the most difficult periods in its history. The financial stresses of the past month will inevitably make an already difficult economic environment worse, and the next six months or so are likely to be extremely challenging. No industry or sector will be unaffected. The good news is that recent measures have started the necessary process of cleaning up the financial system that will permit the economy to move forward. In that sense this is the beginning of the end of the financial crisis,” said Cushman in the Financial Industry Crisis report.
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Industry Group Views
ICSC recently reported the results of its monthly Shopping Center Executive Opinion Survey, which asked executives’ to give their opinions on shopping center industry conditions between Sept. 19 and Sept. 30. More than 76% of respondents said their local markets have experienced lower property sales in comparison to the prior three-month period. Showing industry executives have come to accept this as reality, only 2.6% of respondents said sales had increased in the past three months.
Even more drastic is the widespread acknowledgement of the tight credit market — 89.2% of executives said that equity financing for retail real estate acquisition and development is less available; not a single respondent believed that equity financing is “more available” than it was three months ago. Further, 94.4% of executives said that this is a worse time to borrow than it was three months ago.
On the subject of capitalization rates, 75.7% of executives said that cap rates are higher or much higher than they were three months ago and not a single respondent said cap rates were lower than three months ago. On their expectations for where cap rates will be six months from now, 8.1% of respondents think cap rates could lower and 24.3% are hoping they will stay the same; however, 67.6% expect cap rates will be higher or much higher than they are now.
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ULI, together with Pricewaterhouse released its Emerging Trends in Real Estate 2009 report on Oct. 21, 2008. This annual industry outlook report, in its 30th year, sums up interview and survey responses from more than 600 real estate experts across all sectors.
The report says that shopping centers have turned a corner and are now perceived as “high risk”, which has shopping center owners “bracing for value losses.” The report, addressing capital markets across all sectors, advises investors not to buy until owners come to grips with these value losses in the form of lower sale prices, “Until sellers relent, investors should sit tight, amass as much capital as possible and wait for prices that clear the market. Opportunities will surface at significant discounts to peak pricing and patience will be rewarded. Investments made in 2009 could result in substantial future returns.”
Many of these “significantly discounted opportunities” may arise from an increasing number of commercial property foreclosures in 2009, according to expectations of respondents. “For 2009, expect commercial foreclosure rates to increase as lenders bite the bullet on workouts and special servicers become more active. Defaults and delinquencies will not approach levels seen in the early 1990s, but could rise to 3% to 4% of outstanding loans.” Bankers will be pressured to “clear up” their portfolios, warns the report.
So what U.S. retail markets are an investor’s best bets? Overall, respondents lean toward major U.S. cities, and dial down even further to urban infill properties. 91.8% of respondents recommend buying or holding on to property in Washington, D.C., followed by Seattle (94.2%), San Francisco (94.2%), Los Angeles (87.9%), New York City (86.7%), Dallas (85.7%), Boston (82.7%), Chicago (81.1%), Houston (79.1%), Denver (77.6%) and San Diego (77.1%).
Where do respondents expect capital to come from in 2009? On the equity side, private equity firms, opportunity funds and hedge funds top the list, followed by institutional investors and pension funds. On the debt side, respondents put mezzanine lenders at the top of the list, followed by non-bank financial institutions and insurance companies. Because of the weak dollar, respondents expect foreign investors to continue to buy property, and a good percentage lean towards retail investment. However, respondents predict that the availability of equity and debt capital from all sources will decline in 2009, and in addition, 69.1% expect underwriting standards will become even more stringent in 2009.
On what to expect for the capital markets in 2009, the report states, “As markets deleverage and correct, the length and severity of the re-pricing process will influence the resumption and intensity of capital flows. No one should make assumptions too readily.”
