CHICAGO, ICSC EMBARGO: May 1, 2008 – While retail investment properties continue to show strong underlying fundamentals, some investors are awaiting a return to stability during this continued economic slowdown, according to Jones Lang LaSalle’s Retail Investment Sales Mid-Year Outlook for 2008. However, with debt readily available at loan to value levels of 50-65 percent, interest rates are changing on a daily basis and the corresponding asset valuations are in flux—leaving the door open for many other investors to actively acquire retail property and take advantage of a softening of pricing, according to Jones Lang LaSalle, a market leader in retail sales, leasing and management.
2007 was a milestone year for retail transaction volume in the United States. In the first 11 months of 2007, $32.3 billion in strip-center and $6.9 billion in mall investment sales were completed. These sales figures represent a growth of 32 percent and 56 percent, respectively, over the same period in 2006.
“Following one of the most successful years in real estate history, the current turbulence in the debt and economic environment provides little doubt that 2008 will be a challenging year for retail investment sales. However, there are bright spots on the horizon,” says Jim Koury, Managing Director of Retail Investment Sales at Jones Lang LaSalle. “Institutional investors and insurance companies are starting to step in to acquire existing Commercial Mortgage-Backed Securities (CMBS) and Collateralized Debt Obligation portfolios that are felt to have been mispriced relative to risk. These are positive early indications that there may be some liquidity returning to the CMBS market.”
The strong fundamental values of retail investment have not changed in 2008, although the instability in the greater financial markets is fostering a growing “wait-and-see” attitude among investors. Furthermore, an abundance of international and domestic equity remains available for U.S. real estate while low and moderate levels of financing are achievable via life insurance companies and banks.
Managing Director of Retail Investment Sales Larry Krasner says, “From an international perspective, the United States has 12 of the top 20 most active markets for cross-border investment, underlining the belief that the U.S. remains a desirable place for real estate investment. Although sellers and buyers are adjusting the pricing paradigm, prices per-square-foot remain high and cap rates low from a historical perspective. What has changed in 2008, is that there is growing buyer interest for transactions in the $50 million range rather than the large portfolio transactions of the past.”
Although the CMBS market may take six to 12 months to recover, there is still ample debt available from insurance companies and banks. And although the market is no longer generating values for retail property at the historically high levels of just nine months ago, many owners realize that today’s retail values in the 7-8 percent capitalization rate range are nonetheless still at 25 year highs, and are proceeding to sell those assets and also take advantage of a low 15 percent capital gains tax that may be at risk in a Democratic administration.
“By all accounts—housing woes, mortgage defaults, tightening credit, cutbacks and lower consumer confidence levels– provide for the potential of a protracted period of turbulence in the shopping center industry,” says Greg Maloney, CEO and President of Jones Lang LaSalle Retail. “However, the retail industry has historically risen to the challenge, recalibrating and revitalizing its offering to the American consumer with innovation and clarity.”
In the current environment, it is not unusual for retailer and investors alike to look inward and focus on ways to better serve their clients, lay the foundation for the future, and position themselves for the next growth cycle.