By J.D. Parker
and Michael J. Fasano,
Marcus & Millichap
The U.S. retail investment sales market staged a strong performance last year as property sales rose 32 percent from 2010 to nearly $61 billion.
Prices for power centers and neighborhood centers increased 9.1 and 7.2 percent, to $148 and $135 per square foot, respectively.
While the highly coveted single-tenant net-lease investment sector continued to gain momentum, shopping centers and other multi-tenant properties captured nearly 68 percent of total sales, for which cap rates compressed by 40 basis points.
Gateway investment markets New York, Northern New Jersey, Los Angeles, Chicago, Washington, D.C., South Florida and Boston dominated this investment activity.
New York City.
The booming tourism industry will support solid consumer spending this year, encouraging retailers to expand in the five boroughs.
In the last year, NYC recorded the largest increase in visitor volume in the nation due to a surge in international tourists, a mild winter and strong attendance at conventions.
The rise in volume has bolstered hotel occupancy citywide to pre-recession levels, while favorable exchange rates helped boost retail sales to peak levels.
Tenant interest for space on Fifth Avenue will allow landlords to enhance rents significantly this year, while the ongoing transformation of Lower Manhattan will boost foot traffic in the area. The upswing in tourism is rippling to the outer boroughs as well.
Budget-conscious travelers can rent a room in Long Island City, Williamsburg and Downtown Brooklyn for an average of $60 less per night than comparable rooms in Manhattan.
As a result, developers will ramp up construction and deliver a total of 3,400 rooms to the city this year, while another 6,200 rooms will come online by 2014.
Retailers will capitalize on this trend and expand near new developments and tourist attractions to capture a slice of the estimated $32 billion visitors are expected to spend in New York City in 2012.
Supply constraints and intense demand for retail properties in NYC will keep cap rates compressed. As uncertainty persists in Europe, private and foreign buyers will expand in primary markets to reduce risk.
In Manhattan, Midtown will draw keen interest as investors acquire retail condos with a value-add component, while more conservative buyers will purchase single-tenant assets leased to a highly rated tenant.
As competition remains fierce, initial yields will average below 5 percent for investment-grade properties. Buyers hunting for higher yields and lower price points, meanwhile, will turn to downtown for under-performing properties.
The median price in the area is 15 percent lower than Midtown’s and returns average up to 200 basis points higher.
In the outer boroughs, a bulk of the deals will be closed by local syndicates. Investors will target mixed-use, residential properties valued below $5 million in densely populated neighborhoods. After doing improvements to boost rent rolls, most owners will hold the property for long-term cash flow.
An improving economy will bolster consumer spending this year, while discounted rents will allow tenants once priced out of the market to expand in the state.
In Northern New Jersey, the revitalization of Jersey City has prompted city officials to create a more vibrant downtown by expanding restaurant row and loosening requirements to obtain entertainment licenses.
Rising rents across the Hudson may encourage mom-and-pop tenants to consider locations along the waterfront, where favorable leasing terms will lower expenses.
Elsewhere, the opening of the Revel casino and resort will be a major economic boon for South Jersey. The casino has already hired 5,500 employees, which will lower the unemployment rate and should support wage growth in the region.
Additionally, the influx of visitors to the resort will boost retail sales and entice tenants to expand nearby.
Sales activity will remain firm in New Jersey as owners look to sell assets in advance of potential increases in interest rates and capital gains taxes.
Private investors will target stabilized shopping centers with national retailers in affluent pockets of the state. Due to the rarity of these listings and intense demand, first-year returns will remain tight. Averaging in the low- to mid-7 percent range, depending on tenant lineup and location, the spread between initial yields and financing rates will offer investors a favorable alternative to other asset classes.
Local high-net-worth individuals, meanwhile, will compete for well-occupied strip centers as lenders expand access to financing.
A few qualified buyers will secure inexpensive debt to reduce equity commitments, while value-add investors will pay cash for strip centers with short-term leases.
Once leases rollover, operators will make major upgrades to the property to capture higher rents over the long-term. Cap rates on this property type will trade as low as 8 percent.