Retail CRE Trends
Rising interest rates, foreign investment impact South Florida commercial real estate market
More than halfway through 2018, the South Florida retail market is going through a combination of headwinds and tailwinds. Rising interest rates remain a focus for commercial real estate investors. International investors continue to show strong interest in retail properties. Shopping center landlords are also still facing competition from e-commerce and store closures. So, for the rest of 2018, what retail sector trends should industry players keep an eye on?
Investment sales velocity decreases
Since January 1 through June 29 of 2018, there have been a total of roughly 447 retail investment sale transactions completed throughout the South Florida tri-county region. Of those deals, 246 (51%) involved multi-tenant retail centers and 201 (42%) were single-tenant net leased properties.
Over the same period in 2017, there were 347 single-tenant net leased transactions, which is 101 more than in 2018 YTD. Multi-tenant retail centers transactions from January 1 through June 29, 2017 were considerably higher by 187 transactions for 433 total transactions.
The slower market velocity is a direct result of the Fed increasing interest rates, which has caused the current decompressed CAP rate environment. Interest rates jumped from 2.26% in June of 2017 to 2.84% as of June 29, 2018. Cap rates for retail properties rose from an average of 6.06% in Q1 2018 to 6.25% in Q2 2018.
Canadian investors active
The most active buyers in today’s market are 1031 exchange buyers, value-add and opportunistic buyers, who are looking to hold retail properties through the next five-to-seven-year cycle. The market has had less influx of foreign capital from places such as South America and China over the past two to three years. Having said that, the South Florida market saw an increase of Canadian capital, as investors are getting priced out of certain markets across Canada due to rapid growth and massive development in core urban MSAs.
Private parties are still sellers, but at a much smaller percentage than regional and national equity groups and REITS, as the cost basis for a sale moves from traditional motivating factors to yield spread, internal rate of return (IRR), and portfolio re-positioning.
Retail rent rates dropping
With big-box tenants continuing to struggle with competition from e-commerce, as evidenced by recent store closures by Toy’s R US, Macy’s and other notable national tenants. Rents for power centers and malls have seen a decrease in rental rates from Q1 to Q2 2018, by -1.9% and -4.3% respectively. Strip centers experienced nominal rental increases of roughly 2.1% due to the nature of the tenant mix, which tends to be more service-oriented and is less effected by e-commerce.
This trend should continue moving forward as landlords attempt to backfill larger big-box spaces. Landlords will need to provide concessions and tenant improvement funds to attract suitable retailers and other tenants offering more of an experience rather than specific products, i.e. family entertainment, trampoline parks, movie theaters, mini golf, etc.
Robert Granda is director of investment sales at Franklin Street Real Estate Services, specializing in retail brokerage throughout South Florida. Reach him at Robert.Granda@franklinst.com or 954.671.1826.