Retail Investment Outlook. United States Q4 2015

Transcription

1 Retail Investment Outlook United States Q4 2015

2 Retail investment sale volumes (billions of $US) Retail Investors are focusing on safe bets targeting the top gateway markets, Class A malls and credit tenants U.S. Retail investment $ % Investment sales (2015, billions of $US) Annual investment sale growth (%) 22.5% -50 bps 12-month change in pricing (p.s.f., %) U.S. Retail investment sales by market type 2.7% Annual primary volume growth (%) 2015 change in cap rate (bp) 3.9% Annual secondary volume growth (%) -35 bps -23 bps 2015 change in primary cap rate (bp) 2015 change in secondary cap rate (bp) Despite a slow fourth quarter, retail volumes increased 1.0 percent at year-end, transacting above prior peak levels for second consecutive year $80.0 $60.0 $40.0 $20.0 $0.0 Q1 Q2 Q3 Q4 Retail yields in 2015 hit their lowest level at 4.8 percent since % 6.0% 4.0% 2.0% 0.0% 4.8% 2.3% 10-year Treasury rate (%) Average retail cap rate (%) Total retail transaction volumes in the fourth quarter of 2015 totaled $18.8 billion, a 16.1 percent decline year-over-year. Full-year volumes, however, inched up 1.0 percent. Average per-square-foot pricing of $548 simultaneously rose 22.5 percent year-over-year, the highest level in recent history. Cap rates continue to steadily compress, having declined an additional 50 basis points in While the majority of the most active markets during the year saw little or flat volume growth, Northern New Jersey was a major standout. Transaction volumes rose from $757.8 million in 2014 to $2.5 billion in 2015, more than tripling in activity. Mall transactions largely spurred this growth, particularly the sale of The Mills at Jersey Gardens, which accounted for 38.0 percent of total market volumes in the first quarter. Despite lower volumes in the fourth quarter, 2015 retail investment sales rose slightly year-over-year. Total retail transaction volumes in the fourth quarter of 2015 totaled $18.8 billion, a 16.1 percent decline year-over-year. Full-year volumes, however, inched up 1.0 percent. Tight leasing markets translate to high demand and pricing, particularly for urban properties. Top-performing primary markets with strong leasing fundamentals are seeing the continued appreciation of value for well-positioned, well-tenanted urban product. As Class A mall performance improves, investors are adopting portfolio and partial-interest deal structures for acquisitions. Total investment volume for malls increased in the last year, rising 33.3 percent to $10.4 billion in 2015, and accounted for 17.2 percent of overall retail investments, up from 11.2 percent the prior year. The few buyers of power centers are targeting big-name big boxes. Power centers anchored by prominent, credit big box tenants drove deal flow in Bed Bath & Beyond, Ross, PetSmart, Kohl s and Target each had 2015 volumes that accounted for more than 10.0 percent of total power center volumes. While lagging peer sectors, foreign appetite for retail product remains selective. Foreign penetration into the US retail market increased 410 basis points in 2015, with a growing number of private and institutional investors. Despite a $9.2 billion decrease in REIT activity year-over-year, single asset acquisitions are growing at a healthy pace. While REIT retail investment declined by 34.7 percent in 2015, investment growth in tertiary markets indicates a lack of product of scale in the primary and secondary markets. 2

3 Tight leasing markets translate to high demand and pricing, particularly for urban properties Not surprisingly, the markets with the highest average pricing are those with some of the tightest space availability. In such markets, rent growth has been strong, benefitting property-level income fundamentals. These top markets including San Francisco, Hawaii and Miami tend to be gateway or destination markets that receive a significant proportion of domestic and international tourism: San Francisco s historically low vacancy and high rents have shot it to one of the top leasing performers among retail markets. The market boasts one of the lowest vacancies at 2.1 percent, largely as a result of a lack of available land and strict construction laws that preclude large-scale, ground-up development. As a result of these dynamics, San Francisco average pricing jumped to $1,355 per square foot, leading volumes to rise from $436.2 to $668.4 million year-over-year a result of pricing gains rather than the actual number of properties traded. Acquisitions primarily took place within the CBD. Hawaii has also seen consistently low vacancies coupled with proportionally strong absorption 1.9 percent of its total inventory annually. The market saw an exceptional increase in per-square-foot pricing in 2015, credited to a few key transactions throughout the year, including the July sale of an urban property on Kalakaua Avenue at pricing of $4,025 per square foot. Miami is another top metro that has relatively low vacancy and has been comparatively under retailed compared to many other markets. Pricing remains high for urban properties in fact, higher than average pricing in San Francisco. Top performing primary markets with strong leasing fundamentals are seeing the continued appreciation of value for well-positioned, well-tenanted urban product. This is on the heels of strong rent growth in urban submarkets, having increased 8.0 percent over the past two years and surpassing prior peak levels, as suburban rent growth lags. There is some question regarding how long urban pricing can continue to escalate at its current pace. We may soon approach buyer resistance in terms of cap rates and per-square-foot pricing. However, leasing momentum and rent growth will benefit income fundamentals in these markets. Percent of 2015 transaction volume Grocery 7% Freestanding 3% Unanchored 7% Unanchored 8% Other 5% Anchored 8% Miami Urban/ store front 50% Anchored 23% San Francisco Urban/ store front 64% Other 25% 3

4 As Class A mall performance improves, investors are adopting portfolio and partial-interest deal structures for acquisitions Mall performance continues to be bifurcated with Class A malls outperforming. If one were to exclude all retail properties with vacancies over 40.0 percent, the National Index of vacancies would fall (according to PPR) from 6.2 percent to an ultra-low 2.7 percent a much more realistic perspective of the competitive retail landscape. Net absorption for malls in primary markets has also been comparatively higher. Total 2015 absorption for malls in the 19 major retail markets (that JLL tracks in its Retail Outlook report) was approximately 4.7 million square feet. Of that total, 77.0 percent of absorption took place in 10 primary markets. Freestanding 15% Other 6% Urban/ store front 17% Other 5% Freestanding Power 6% center 7% Urban/store front 22% Power center 11% Unanchored 8% 2014 Anchored 14% Mall 11% Grocery 18% Unanchored 10% Anchored 13% 2015 Mall 17% Grocery 20% Total investment volume for malls increased in the last year, rising 33.3 percent to $10.4 billion in 2015, and accounted for 17.2 percent of overall retail investments, up from 11.2 percent the prior year. Furthermore, more than one-third of mall transaction volumes took place in three major West coast markets. It is interesting to note that for these three markets, the proportion of mall absorption during 2015 was at or above 1.0 percent of inventory. In line with other sectors, acknowledging limited Class A mall investment opportunities on the market, investors are looking to portfolio and partial-interest transactions as a means to expanding retail mall exposure. Central Florida Fairfield County Phoenix Portland Tampa New York Boroughs Dayton Columbus Orange County Los Angeles Hawaii $286 $290 $315 $328 $345 $385 $398 $427 $568 $881 $2,568 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Retail investment sale volumes (millions of $US) 4

5 Investment sale volumes, 2015 (billions of $US) Power center volumes (as a % of total) Power center investment sale volumes (billions of $US) The few buyers of power centers are targeting big-name big boxes Following weak power center fundamentals since the recession, the sub-type s leasing performance has stabilized in recent quarters. Demand has consistently outpaced supply additions since the end of the recession, which has pushed down vacancy. In fact, vacancies for power centers are back to pre-recession lows, having declined 170 basis points since Despite this stabilization, the tenants signing leases in power centers are paying lower rents. As a result, while rents inched up modestly in 2015, power center rents fell 19.4 percent between 2008 and $9.0 $8.0 $7.4 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $2.3 $3.0 $5.0 $5.7 $5.5 $5.9 $2.0 $1.4 $2.9 $4.9 $4.6 $6.3 $4.2 $1.0 $ Despite stabilization in the leasing markets, power center transaction volumes declined in 2015, accounting for 6.9 percent of overall 2015 activity compared to 11.4 percent last year. This is further reflective of a constrained buyer pool for power center product with public REITs and private equity funds the most active. However, power centers anchored by prominent, credit big box tenants drove deal flow in Bed Bath & Beyond, Ross, PetSmart, Kohl s and Target each had 2015 volumes that accounted for more than 10.0 percent of total power center volumes. Furthermore, the top 10 anchors for transacted product all had solid S&P credit ratings of BBB or above, reflecting a heightened focus on credit for these assets. $0.9 $0.8 $0.7 $0.6 $0.5 $0.4 $0.3 $0.2 $ % $ % $ % $ volume ($B) % of power center volume 14.2% 13.0% 9.5% 8.8% 8.8% $0.6 $0.5 $0.4 $0.4 $ % 7.1% $0.3 $ % 20.0% 15.0% 10.0% 5.0% $0.0 Bed Bath & Beyond Ross PetSmart Kohl's Target TJ Maxx Home Depot Marshalls Costco Nordstrom Rack 0.0% 5

6 Retail transactional volume (in billions $US) While lagging peer sectors, foreign appetite for retail product remains selective with relative buyer activity increasing 410 basis points in 2015 Though retail volumes lagged other sectors in 2015, foreign penetration into the retail sector increased from 5.2 to 9.3 percent year-over-year. In total, foreign retail investment increased by $2.8 billion this year and accounted for 9.3 percent of total retail volumes. Foreign institutional buyers are proving to be selective in the U.S. retail market, given the misalignment between product focus and opportunities on the market, few of which are of the target profile and scale. Of those foreign investors spending more than $50.0 million in aggregate in 2015, sovereign wealth funds and pension funds made up 39.6 percent of acquirers. These institutional investors are typically drawn to Class A malls. In 2015, nearly $1.5 billion was spent on mall product located in growing secondary markets, all of which were part of larger mall portfolios. In the largest transaction of 2015, Singapore-based GIC made a large splash in the retail market. After previous years of low to no retail transactions and large investments into the industrial sector this year, GIC invested over $1.3 billion in mall properties located in growing, predominantly West Coast secondary and tertiary markets as part of a partial-interest transaction with Macerich. Private foreign investors are also entering the retail market but at a smaller scale. In 2015, the U.S. retail market saw investor representation from 26 countries (39.9 percent from Europe; 24.4 percent from Asia). Of the 26 countries, seven were either new to the U.S. retail market or had only had a presence in one other previous year. An overwhelming 81.1 percent of those foreign investors spending below $50.0 million in aggregate were private investors, largely investing in single asset, urban product in primary markets. While large institutional investors have struggled to identify opportunities to acquire this product at scale, private investors remain focused on this retail sub-type. Moving forward, foreign capital will remain selectively focused on the U.S. retail sector, identifying on- and off-market investment opportunities into Class A shopping centers or urban product with strong U.S. sponsors. For investors able to successfully aggregate urban scale in leading U.S. markets, opportunities exist for co-investment with larger cross-border investor groups. $35.0 $30.0 Portfolio Single asset $25.0 $20.0 $5 $9 $15.0 $8 $8 $11 $10.0 $6 $21 $20 $4 $7 $5.0 $8 $10 $11 $3 $1 $5 $7 $1 $4 $0.0 $ Despite a $9.2 billion decrease in REIT activity year-over-year, single asset acquisitions are growing at a healthy pace 2014 saw a spike in REIT investment sales, leading to a 34.7 percent decline in REIT acquisitions in At first glance, this may look as if REIT interest declined. However, 2014 was characterized by large portfolio transactions and an abundance of desirable retail opportunities on the market. In 2014, over $20.2 billion was invested into retail portfolios by REITs. VEREIT, the most active REIT in the retail market that year, invested roughly $11.0 billion in retail product, including a $10.3 billion portfolio 75.0 percent of which were freestanding, single tenant retail assets from Cole REIT. This heightened large portfolio activity inflated the market, giving the illusion of a severe drop in appetite this year. However, if excluding portfolio purchases, REIT acquisition activity in the retail sector has not changed dramatically in the current cycle, with the number of active REITs steady. Though retail portfolio investment by REITs was down by 44.7 percent this year, single asset purchases decreased by only 12.8 percent, with over $4.0 billion notably invested in anchored shopping center assets in tertiary markets. This increased focus on tertiary markets is a shift from previous years and indicative of a lack of available product of scale in primary and secondary markets. In 2015, 80.8 percent of REIT retail investments were made in tertiary markets with 16.7 percent of those investments in malls. Kimco Realty and Inland Real Estate Corp. were two of the five most active REIT investors. While Kimco acquired power centers and grocery-anchored product in tertiary markets, Inland continued to invest in anchored properties in tertiary markets. Looking ahead, REIT activity in the retail market will continue to grow at a steady pace and will follow the cues of the economy, likely taking advantage of growing secondary and tertiary retail markets. 6

7 Retail assets in primary markets achieving nearly a 200 basis point premium to secondary markets While most markets illustrated on the chart below have cap rates averaging between 6.0 and 7.0 percent, there are some notable standouts. New York City, logically, has the lowest cap rates of all the markets at sub-4.0 percent, while San Francisco is seeing sub-5.0 percent pricing. Boston, Washington, DC, Los Angeles and Seattle are also enjoying below-average cap rates. Washington, DC, in particular, has seen tremendous compression over the past 12 months in excess of 100 basis points. Furthermore, of the markets shown below, none are seeing core product trade above 8.0 percent, and most markets are experiencing healthy year-over-year compression of cap rates. U.S. retail cap rates Seattle % WA MT ND ME CA OR Sacramento % San Francisco % NV Los Angeles % San Diego % % % % % ID UT Phoenix AZ % WY NM Denver CO % SD NE KS OK MN Dallas % Austin TX % Houston % IA Minneapolis WI NY % Detroit MA % Pittsburgh CT MI Chicago Cleveland % % % % Philadelphia NJ Indianapolis Columbus % IL IN OH PA DE % % Washington, DC Cincinnati WV % MD % MO AR LA MS TN AL KY Atlanta % GA Tampa % SC FL VA Charlotte % NC VT Raleigh % Orlando % NH Boston % NYC - RI Manhattan Miami % Source: JLL Research, Real Capital Analytics, January

8 Portfolio transactions, Q Property Buyer Seller Market Price Size (s.f.) Price p.s.f. Chambers/Gramercy Merger Chambers Street Properties Gramercy Property Trust Multiple $2,300,000,000 24,877,900 $92 Macerich Retail Portfolio Partial-interest GIC Macerich Multiple $1,385,700,000 7,771,929 $483 Madison International NY Retail Portfolio JLL Income Property Trust JV TRS of Texas Madison International Multiple $1,282,000,000 2,865,894 $447 Retail/Warehouse Portfolio Prologis Morris Realty Associates LLC Multiple $820,000,000 3,200,000 $256 Westfield Mall Portfolio Partial-interest USAA RE JV Blum Capital Westfield Multiple $818,000,000 3,370,616 $326 Notable single asset transactions, Q Property Buyer Seller Market Price Size (s.f.) Price p.s.f. Times Tower (Retail Condo) Kushner Companies Five Mile Capital New York $295,300, ,000 $1,257 Future Shoppes at Carlsbad Rouse Companies Westfield San Diego $170,000,000 1,100,000 $155 Chanel Chanel Angelina David & William Sater Los Angeles $152,000,000 11,500 $13,217 Riverdale Crossing Vanbarton Group Metropolitan Realty Associates New York $132,950, ,037 $836 Christown Spectrum Kimco Coventry Realty Advisors Phoenix $115,275, ,638 $136 Sunset Place Federal Realty Simon Miami $110,850, ,000 $214 Outlets at Barstow Craig Realty Group Tanger Factory Outlet Inland Empire $106,675, ,300 $623 Panorama Mall Primestor Development Inc Macerich Los Angeles $98,000, ,000 $590 Criterion on the Promenade American Realty Advisors Metropolitan Pacific Cap Inc Los Angeles $96,250,000 52,900 $1,819 Tempe Marketplace AEW Capital Rockwood Capital Phoenix $91,750,000 1,300,000 $282 8

9 For more information, please contact: Investor Sean Coghlan Director, Investor Research Retail Keisha McDonnough Sr. Analyst, Retail Research Click for more research on: Retail About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.