Aug 7, 2008
By: Paul Rosta, Retail Editor

It is hardly a secret to investment sales professionals that the retail sector is going through tough times and that the prospects for the rest of the year are uncertain at best. "We don’t have a crystal ball here, but I think the economy is the wild card," said Dan Fasulo, managing director for Real Capital Analytics Inc. "This is the first consumer-led recession we’ve had in two decades." Retail was also among the first sectors to bounce back in 2003-04 during the earlier part of the cycle, he noted.

That said, Real Capital Analytics’ most recent analysis underscores how severely the capital markets squeeze and the shaky economy continue to hammer retail investment:

• New retail offerings hit $27.5 billion during the first half, a 12 percent jump year-over-year;

• Retail property sales plummeted to $12.2 billion nationwide, a 62 percent drop from the first half of 2007;

• Second-quarter retail investment sales totaled only $5 billion in the second quarter, declining $2.2 billion from the first quarter;

• No significant malls traded during Q2;

• Cap rates for strip centers have risen 40 basis points since the credit crunch hit;

• Bankruptcies among national and regional retailers continue to mount; Mervyns and Steve & Barry’s are among the most recent.

In many cases, drilling down among retail investment niches reveals more of the same. The striking absence of mall sales, for example, stems in large part from the complexities of leasing and other issues surrounding those properties. “In this type of lending environment, it’s almost impossible to put together acquisition financing for a mall,” explained Dan Fasulo, managing director for Real Capital Analytics. Further hampering mall sales is that most are now in the hands of retail REITs, which generally acquire properties with the intention of holding rather than flipping them. A rare exception of a mall offering is one in the Northeast brought to market in May 2007 by Syracuse, N.Y.-based Pyramid Cos. Estimates at the time placed the portfolio’s value at $4 billion, but the assets have yet to trade.

But while Fasulo is not looking through rose-colored glasses, he also cautions against overlooking nuances of the retail market, arguably the most diverse of the major property sectors. Fasulo even singles out one niche as a “superstar:” retail properties catering to luxury buyers in gateway markets like Los Angeles, Miami and Manhattan. Although high-end shopping by American consumers has fallen off this year, the weak dollar is drawing an influx of international visitors who are spending big-dollar purchases.

This trend is influencing leasing activity and, by extension, investment sales. “There are so few availabilities that every time a vacancy pops up, (it attracts) multiple bids from luxury retailers, in turn driving up sales,” Fasulo explained. As a case in point, he cites Paramount Group’s recent purchase of a 16,200-square-foot storefront at 718 Fifth Avenue in Midtown Manhattan. At an estimated price of $124 million, the property fetched about $7,659 per square foot.

On another part of the retail spectrum, investors are also smiling on stand-alone, net-leased properties, like bank branches and drugstores. Cap rates for those properties are generally up only about 15 to 20 basis points compared to the roughly 75 basis-point rise for retail properties overall. In light of a slow consumer activity, Fasulo explained that investors like the combination of qualities frequently offered by those properties: a relatively small retail asset and a good credit tenant that is on the hook for a long-term lease. For example, Real Capital Analytics recently found sales of Walgreens stores in Homestead, Fla., Essex, Md., and Graham, Wash., all for prices ranging from $6.5 million to $7.2 million.

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