Retail Capital Market Update, Q3 2019

National Cap Rate Trends


National Retail Market: Cap Rate Trends, 2014 Q3 – 2019 Q3

Source: REIS, Real Estate Solutions by Moody’s Analytics


The chart above, illustrating the retail cap rate trends, shows how the average cap rate increased in the third quarter to 7.8% after falling in the previous three quarters. This chart looks like a return to normalcy as the average for the third quarter is the same as the ten-year average. Indeed, given all of the store closures this year and last, it is still surprising that retail cap rates have held up as well as they have over the last year. The 12-month rolling average was 7.6%, little changed from last quarter and just below the ten year average. We caution that selection bias runs much deeper in retail property sales than in other categories as the range of retail properties that trade “retail” is much broader than that for office and apartment.

These rates are consistent with the property market where rent growth was 0.3% in the quarter, and 1.6% over the year. The mall vacancy rate increased to 9.4% from 9.3% in the second quarter and rent growth was 0.2% in the quarter. In other words, the underlying retail market is holding up better than many had expected. That said, the fallout from the store closures as well as the continued restructuring in this sector will continue to affect retail real estate in the coming year.


Average Price per SF


National Retail Market: Average Price per SF, 2013 – 2019 Q3

Source: REIS, Real Estate Solutions by Moody’s Analytics


The chart above shows the average prices per square foot. We can see that there is a significant jump for both the top 10 metros as well as the next 40 metros, as we have added the “remaining” 40 metros in the dark blue line to illustrate that this was not weighted by a handful of trades in top tier markets. Instead, it was weighted by a handful of trades in the second tier of markets as more than 15 retail trades cleared $1,000 per square foot.

For the top 10 metros, the average price jumped to $250 per square foot from $150 per square foot. It had changed very little over the prior six quarters. For the top 50, the average jumped from $150 to $200 dollars while in the remaining 40 markets it jumped from $150 to $175. Note how all the metros had converged last quarter before they all jumped in this quarter. But let’s address some of those significant trades.

In New York City, a prime SoHo retail condo on Greene street sold for $25 million or close to $3,500 per square foot. Theory, the clothing retailer, currently occupies the space. Prime SoHo retail properties have long traded for stratospheric prices. Likewise, the large retail condo on 196 Orchard Street that houses an Equinox, CVS and Marshal’s sold for $89 million or close to $1,500 per square foot. Outside of New York, retail condo sales that topped $1,000 per square foot include the Nike store property on M street in Washington DC that sold for close to $50 million; the large Lululemon store property on West North Avenue in Chicago that traded for $32 million; the commercial space on Independence Mall South in Philadelphia that houses a large and popular Wawa sold for $26 million. Other retail condos in La Brea California and Miami Beach also traded for north of $1,000 per square foot. These are all prime retail sites in core cities. In short, investors are paying high prices for retail properties that draw significant traffic. Outside of these prime trades, retail investment sales have dropped off significantly. Thus, the sharp increase in these lines in the third quarter was disproportionately due to these high-end sales, more so than in most quarters.


Sales Volume


National Retail Market: Indexed Transaction Volume, 2013 – 2019 Q3

Source: REIS, Real Estate Solutions by Moody’s Analytics


As this chart shows, retail sales volume had been trending higher in the last two years, but then it dropped significantly in the third quarter.

In the top 10 metros, the drop in the third quarter shown here was not as pronounced as the drop in the top 50. And of course, the top 10 metros include more urban areas, while the top 50 include many of the larger suburban markets that have a wide range of inventory. Last quarter, the suburban markets seemed to dominate the statistics, whereas this quarter it was the prime urban core that dominated. The details show that investors are willing to pay for properties in good locations, regardless of where they are located. Yet, we still see a wide gap between the stronger properties or submarkets and the weaker properties in poorer locations.

Analysis by Barbara Byrne Denham. Denham is a Senior Economist in the research and economics department at REIS, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services. Throughout her 20-year career, Barbara has written a number of white papers on the commercial real estate market.

Copyright © 2019 Reis, Inc.


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