Investment Blog – January 2019

Anchor Admin

January 1, 2019

As is the ritual with each new January, we encounter a fresh start on 365 new days, and the commercial real estate market is no different. Within the first 31 days of 2019, Anchor Cleveland is pleased to introduce the first edition of our Monthly Investment Sales Newsletter.

2018 brought Brokers, Tenants, Landlords and Investors alike a strong but versatile market. After reaching the peak of the market in the 4th Quarter of 2017 on retail investment sales, we experienced gradual increases throughout 2018 in capitalization rates that reflected in lower price points on sales transactions. The escalation of cap rates were primarily due to increased supply in the market (owners trying to take advantage of a “seller’s market”) and an increase in interest rates brought on by The Federal Reserve.

The Fed recently announced it will be increasing rates two more times in 2019. Even with these increases, mortgage rates will remain relatively low when compared to past years when rates hit the mid to upper teens. Cap rates are expected to endure more increase as well, although with less effect than initially predicted.

Pricing on premier properties continues to rise throughout the country with the top 10 markets experiencing the largestgain. Current multi-family owners are selling existing assets and in turn acquiring retail properties, thus increasing the Buyer pool for retail assets. There is a sharp drop in pricing when comparing “B” and “C” properties to these “A” properties, and the gap continues to widen.

2018 news headlines were focused on store closures/bankruptcies and online sales. However, the retail market for brick and mortar stores remained strong. Some retailers, such as TJX, Ross, Burlington and Gabe’s, have been able to enter new markets by taking advantage of these vacancies. Harder to lease Big Box vacancies have been replaced by gyms, medical, trampoline parks and climate-controlled self-storage.

The rise of ride-sharing and mixed-use living has forced other retailers to adapt to changing consumer demands. Tenants that can provide unique products and/or services have set themselves apart from the competition. Ride-sharing services are beginning to disrupt the demand of large parking fields and allowing property owners to create additional out-parcel buildings, free-standing ATM’s or parks in areas previously occupied by asphalt.

These trends will continue throughout 2019 and will force Tenants, Landlords, Buyers and Sellers to adapt. Sellers will need to accept that although the market is still strong, we have passed the peak. Buyers will need to perform more due diligence in acquiring properties to make sure the asset, the location and the tenant(s) will still be strong for the next 5-10 years. Tenants will need to keep up with consumer trends and strengthen their online presence to supplement their brick and mortar locations.