Retail market remains strong and other key takeaways from ICSC’s RECon

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Heald_Nat_Color_Casual_HiRes 2From Nat Heald
Executive Vice President, Capital Markets

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Much like the real estate industry as a whole, the retail market is thriving, and there’s no better place to get a pulse on the market than ICSC’s RECon. With over 36,000 attendees from around the world, it is the retail real estate industry’s largest conference.

Coming out of RECon, everyone seems to agree that the market will remain strong for the foreseeable future. There’s still plenty of equity and debt earmarked for retail real estate, and there doesn’t appear to be any slowdown in demand or pricing on the horizon. For those that couldn’t be there, here are some of the key trends and takeaways from the event.

Investment market driven largely by Class B sales

  • The majority of investors in today’s market are looking for high-quality properties that “check the boxes”: well-located, well-tenanted, strong credit, long-term leases, strong tenant sales and dense population demographics.
  • In reality, few owners are currently willing to sell top-quality retail assets, in large part because they’ve become so difficult to replace.
  • The majority of deals we discussed at RECon involve solid Class B shopping centers – specifically, grocery anchored properties outside of major metro areas.
  • With the bulk of investor demand focused on core markets, we feel there are excellent but overlooked opportunities in the Class B space.

Debt options improving across retail markets

  • As in the investment markets, lenders continue to be extremely aggressive for the best product in strong markets offering a range of financing structures.
  • Many lenders are becoming more comfortable in secondary markets and the delta in rates and loan-to-value ratios between Class A and B is compressing, particularly as the CMBS market has rebounded in the first half of 2016.

Tenant demand strong despite underwhelming earnings

  • Despite some recent underwhelming earnings reports from certain retail categories, most groups we spoke with anticipate that tenant demand will remain consistent for the foreseeable future.
  • Value retailers in particular continue to thrive and expand. Framingham-based TJX opened 219 stores in 2015 and recently announced plans to add potentially 2,000 more within their current world-wide footprint. TJX also announced that they would be rolling out brick and mortar locations for their previously internet-only Sierra Trading Post brand.
  • Additionally, large European brands like Primark, UNIQLO and various H&M concepts are expanding in major markets across the country.

Conclusions

  • The market remains strong and demand far outweighs current supply, particularly as it relates to core properties.
  • Given this constrained supply in the core and value-add space, we anticipate buyers will recognize opportunity in B-geographies and invest accordingly – which will ultimately drive lower yields for secondary assets.
  • Owners of core and value-add properties will see tremendous demand for their property and pricing that significantly exceeds the last market-peak in 2007. It’s difficult to believe that pricing can get much better than it is today – and savvy investors should consider beginning to build a war-chest for the next phase of this cycle.

For more on some of the key takeaways from ICSC, watch what JLL’s Global Retail Leasing Board Chairman David Zoba had to say about the event below, and feel free to contact me with any questions about the retail investment market.

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