Retail Investment Outlook

Transcription

1 United States H JLL Research Report Retail Investment Outlook Continued low-yield environment driving renewed investor creativity

2 2 Retail

3 Q Q Q Q4 Average rent rate (US$) Average US vacancy (%) Retail the Retail 2017 breakdown 3 It s all in the numbers While investors remain cautious with regard to retail and buyer pools continue to thin, increased retail sales volume is expected for 2018 Property market month change in total vacancy (bps) 0.7% 12-month net absorption (as % of inventory) 0.7% 12-month completions (as % of inventory) 5.5% 12-month rent growth (p.s.f.) Investment market $51.5 Investment sales (2017, billions of $US) -22.5% 2017 investment sales growth 4.3% Average cap rate flat 12-month change in cap rate (bps) Rents grew by 5.5 percent in 2017, marking a slowdown from the rate seen in Rent affordability will remain a key concern in 2018 as retailers continue to announce store closures. J.Crew, for example, more than doubled its planned store closures to over 50 locations set to be shuttered in early 2018, including its 21-year-old SoHo flagship store, after the company experienced a 12.0 percent dip in same-store sales. In 2018, the retail sector will likely continue to see closure announcements, though with less frequency than in Further announced strategic store openings are also anticipated as retailers streamline their physical strategies and e-tailers debut physical locations. Demand New development is very calculated; focus is on investing in and densifying existing space Retail fundamentals continued to grow in 2017, though at a slower pace than in previous years. Against that backdrop, retail construction continues to slow, with more of an emphasis on mixed-use properties. Developers remain conservative with new projects, recognizing the difficulties that retail space is undergoing. New development is more calculated than ever before. Rather than taking on new projects, owners are investing millions into centers to create mixed-use destinations for the evolving shopper including the addition of residential units, office space, hotels, entertainment options, and community and open spaces, or even pivoting entirely to non-retail uses. While retail rent grew by 5.5 percent in 2017, fundamentals are losing speed across markets $20.0 $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 Source: JLL Research Rent rate (US$) Vacancy rate (%) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

4 Transactions Top transactions what s happening and where 4 Investment volumes are down considerably, smaller deals get more traction Retail transaction volume decreased by 22.5 percent to $51.5 billion in The pullback was felt by all asset subtypes, aside from general purpose centers which saw a 10.5 percent increase in transactions. While previous years had larger transactions at the forefront, much of 2017 was comprised of necessity-based, one-off transactions. The consensus is that bigger is not always better. Power center transactions remained steady with cap rates stabilizing by year-end. Community center and neighborhood center transactions were also steady throughout the year each seeing some, albeit minimal growth in transaction volume. But lifestyle centers were rare to come to market and difficult to transact, with the asset type recording volume declines of 48.5 percent in Mall transactions experienced the largest volume declines in 2017, decreasing by 53.5 percent. This is down significantly from 2016 which saw several large-scale transactions including three mall transactions over $1.0 billion in Las Vegas. Pricing continues to be bifurcated with fewer strongly-performing assets coming to market. Mall assets are becoming more difficult to transact given heightened underwriting standards, providing another reason for investors to sidestep malls for the time being. Some misalignment of buyer and seller pricing expectations is anticipated to linger in Underwriting for both malls and power centers has become increasingly complicated. Over the past few years, there has been a shift in the buyer pool towards private investors, particularly for assets that are of less than the highest quality. These local or regional private investors are struggling to rationalize the higher loan to value ratios, and the lower availability of debt is presenting challenges. At times, they are walking away from transactions due to complicated pricing structures and the impact on their returns. Sellers seeking to transact assets quickly will have to further negotiate concessions and remain flexible in deal structuring. Notable primary market transactions, Q Market Property Buyer Price ($) Size (s.f.) Price (p.s.f.) Philadelphia Centerton Square Prestige Properties & Development $129,615, ,327 $300 Los Angeles Whittwood Town Center Kimco $123,000, ,000 $164 San Francisco Pacific Place (Retail) Ponte Gadea $97,990, ,295 $967 Boston Brattle Street Asana Partners $85,495,380 36,000 $2,375 Washington, DC North Bethesda Market (Retail) CBRE Global Investors $84,100, ,153 $422 Philadelphia Centerton Square Prestige Properties & Development $129,615, ,327 $300 Los Angeles Whittwood Town Center Kimco $123,000, ,000 $164 Notable secondary market transactions, Q Market Property Buyer Price ($) Size (s.f.) Price (p.s.f.) Milwaukee Bayshore Town Center (Retail) AIG $209,200, ,000 $223 San Diego Scripps Ranch Marketplace Regency Centers $81,600, ,000 $618 Inland Empire Moreno Valley Mall International Growth Properties $61,375, ,875 $124 Orlando Lake Nona Landing Clarion Partners $58,000, ,000 $173 Los Angeles The Triangle Unimat Commercial $55,350, ,523 $271 Milwaukee Bayshore Town Center (Retail) AIG $209,200, ,000 $223 San Diego Scripps Ranch Marketplace Regency Centers $81,600, ,000 $618

5 Markets With primary markets stagnating, the hunt for 5 pockets of out-performance intensifies With the fluctuation in retail performance in 2017, investors are looking to hedge risk by finding pockets of geographic safety for their acquisitions. Most gateway markets saw investment decline, with San Francisco and Boston as the exception. San Francisco volume increased by 78.8 percent from 2016, rebounding after a low year, due in part to the purchase of mixed-use complex Pacific Place by Spanish investor Ponte Gadea in the fourth quarter for $475.0 million, of which the retail component comprised roughly $98.0 million. While transaction volume is lower, investor interest in primary markets has not wavered. Rather, there is limited supply available for purchase. Investors selling in core markets are likely to move proceeds to another sector altogether as similar-caliber retail assets are few and far between. Prime Urban Retail cap rate map % % % % % % 9.00% + Seattle Pike WA Street 4.50% % OR San Francisco Union Square NV 4.00% CA- 4.50% ID Los Angeles Beverly Hills Triangle 3.00% % AZ Gateway market transaction volumes decline while secondary markets see growth in 2017 Transaction volume (billions of $US) $6.0 $4.0 $2.0 $0.0 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0 million, includes entity-level transactions) UT MT WY NM CO Los Angeles Chicago Houston Philadelphia Fort Lauderdale TX ND SD NE KS OK MN $2.9 $2.5 $1.4 $1.4 $1.3 $ IA MO AR LA WI While gateway markets continue to experience declines in transaction activity, secondary and smaller primary markets are experiencing some growth. The Southeast was a standout in Of the $13.3 billion in acquisitions by REITs in 2017, $3.2 billion was invested in the Southeast region. As an example, Tampa s retail transaction volume grew by 23.5 percent, with $604.0 million in volume. Markets seeing strong population and job growth outperformed, such as Houston and Fort Lauderdale, with 14.0 percent and 41.0 percent volume growth respectively. These cities are emerging as attractive destinations for capital. This trend is expected to continue throughout 2018, with investors evaluating retail opportunities throughout the entire country. Investors are taking all factors into consideration including market and demographics and weighing traditional data points less heavily. Chicago Oak Street 4.50% % IL MS IN AL MI TN KY GA FL NC ME VT Boston NH NY Newbury Street MA 4.00% % CT Philadelphia New York Walnut Street Fifth NJ Avenue 4.00% % 3.00% % OH Washington, PA DC WV M Street 4.00% VA % SC Miami Lincoln Road 4.00% %

6 Transaction volume (billions of $US) 6 Sources capital of Composition of buyers shifts with tightened underwriting parameters The year 2017 brought with it challenges for the retail sector, and in reaction to these shifts, investors tightened target asset parameters, leading to less viable deals. Institutional investors in particular pulled back and invested 41.8 percent less in Where active, institutional investors are looking for very particular buying criteria, including non-mall assets in core markets with strong tenancy but some opportunity for yield. Of note, LaSalle purchased Costco-anchored Greenway Commons in Houston for $84.0 million. Acquisitions by REITs increased by 12.0 percent with $9.2 billion focused on general-purpose centers. While REITs interest in general purpose centers grew by 47.7 percent, mall investment has consistently declined since 2015, falling by 38.7 percent in 2016 and further still by 50.0 percent in While lack of activity by mall REITs prevails, attributed to the lack of opportunity, shopping center REITs see increased transactions in 2017, specifically focusing on grocery-anchored centers. In fact, investment from REITs into grocery centers increased by 7.4 percent in 2017, boasting the second-highest grocery transaction volume aside from the peak in 2015 with $3.5 billion. In 2018, targeted grocery and necessity-based transactions are expected from both REITs and institutional investors as these assets are still viewed as a safe investment when tenanted with strong grocers. Foreign investment into retail declined by 56.7 percent in Appetite for retail from off-shore investors has become very narrow, focusing largely on core assets with some upside, and will likely remain thin through Foreign capital was chiefly placed in general-purpose shopping centers with over $1.0 billion transacted. These transactions were led by Canadian capital with $592.0 million, followed by German capital with $142.0 million. These two inbound capital sources led foreign investment across retail asset types in Retail buyer pools shift in 2017 as some investors pull back $40.0 $30.0 $20.0 $10.0 $0.0 Developer-Operator REIT-REOC Institution-Advisor Developer-Operator transaction volume declined by 14.6 percent in Despite decreases, developer-operators were the most active retail investors with $25.5 billion in purchases. Though trending down over the last four years, REIT-REOC transaction volume increased by 12.0 percent with $9.2 billion in purchases, focused on general-purpose centers. Transaction parameters continue to narrow for Institution-Advisor investors, leading to fewer acquisitions. Institutional investment declined by 41.8 percent in 2017, making way for private investors. Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0 million, includes entity-level transactions)

7 risk Sources of Despite heightened risk with regard to fundamentals, large portfolio acquisitions in the pipeline for 2018 Given heightened risk with regard to retail sales and tenant performance, investors are cautiously tailoring retail strategies and even avoiding transactions where they lack certainty. With that, we expect to continue to see an increase in one-off, small single-asset transactions in As opposed to larger-scale transactions that can bring with them a higher number of risky tenants, investors are opting for smaller centers with growth potential. For example, Katz Properties purchased Richland Marketplace in Philadelphia for $47.3 million from Kimco in the fourth quarter of This was one of 15 transactions to take place in Philadelphia in Q4 all but one being under $50.0 million. Portfolios in 2017 have had the opposite reception, with some small-to-mid size portfolios failing to gain traction while large-scale acquisitions garnered momentum coming into Australian retail REIT Westfield has agreed to be acquired by Europe s largest real estate company, Unibail-Rodamco, for approximately $15.8 billion. In addition, Brookfield Property Partners bid a reported $14.8 billion to acquire U.S. mall owner GGP. These acquisitions are likely to have a positive impact on the retail market, boosting transaction volume significantly, creating momentum in the mall transactions space, and bringing some clarity and new benchmarks to U.S. mall pricing in While trophy assets see continued cap rate compression, urban, mall and general-purpose center properties generally seeing softening 10.0% 8.0% 6.0% 10-year Treasury yield (%) Average primary market cap rate (%) Average secondary market cap rate (%) Average cap rate by retail subsector Urban Mall General-Purpose Center 5.1% % 8.9% 4.0% 2.0% 4.4% 4.2% % 6.3% 6.8% 0.0% % 6.1% 7.0% Source: JLL Research, Real Capital Analytics, NCREIF. Cap rate information is based on best-in-class, institutional-grade assets

8 Investor Research: Sean Coghlan Director, Investor Research Lauro Ferroni Director, Investor Research Office: Industrial: Multifamily: Retail: David Hoebbel Peter Kroner Sean Kane Arielle Einhorn Net Lease: Lauro Ferroni Hotels: Geraldine Guichardo Debt & Equity: Ronak Sheth About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2017, JLL had revenue of $7.9 billion and fee revenue of $6.7 billion; managed 4.6 billion square feet, or 423 million square meters; and completed investment sales, acquisitions and finance transactions of approximately $170 billion. At the end of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of 82,000. As of December 31, 2017, LaSalle had $58.1 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.