Quality small to mid-size retail centers and supermarket-anchored shopping centers remain in demand. Recently, the retail team at Boston-based NAI Hunneman Commercial brokered the sale of three freestanding CVS Pharmacy locations in Cape Cod and Brockton for $9.2 million. The sale is a sign of continued investor interest in freestanding and long-term leased retail properties in the region.
With the ongoing credit crunch, job losses, the wobbly U.S. economy and growing nervousness in the commercial real estate industry, some savvy investors have started to re-examine the strength of the traditionally stable retail investment market in eastern Massachusetts. The question on everyone’s mind is: How strong are retail real estate fundamentals today and how is the current credit crunch affecting the value of retail properties, and therefore their demand in the region? The short answer is that despite the general slowing down of the economy and declining consumer spending, retail real estate fundamentals remain solid. It’s the perception of a weaker market and the perception of declining real estate values that is causing anxiety among investors.
The apparent weakness in the retail investment market today is more a reflection of an investor’s ability to borrow money and capitalization rates rather than market rudiments. Cap rates are a measure of the return from the net-operating income produced by an underlying real estate asset compared to its capital cost. Since last summer, cap rates on shopping centers have increased and the loan-to-value ratio has widened from 75-25 to 60-40. Quality small to mid-size retail centers and supermarket-anchored shopping centers still remain in demand. Average cap rates on such properties are in the sevens today.
The demand for freestanding, triple-net (NNN) leased properties such as Walgreens and CVS remains solid. Of these, Walgreens remains the top choice, with cap rates hovering in the mid-sixes. While smaller shopping centers are being targeted by individual and entrepreneurial investors, retail real estate investment trusts, known as REITs, and institutional investors, are scouting larger centers that are anchored by leading grocers. Retail REITs are the largest purchasers of grocery/supermarket-anchored shopping centers. Investor interest in freestanding and long-term net leased retail properties is strong and we have witnessed continued demand for drugstore locations.
Recently, the retail team at Boston-based NAI Hunneman Commercial brokered the sale of three freestanding CVS Pharmacy locations in Cape Cod and Brockton for $9.2 million. The two Cape Cod stores, located at 1030 Putnam Ave. in Marstons Mills and 176 North St. in Hyannis, were sold to New York-based One Liberty Properties, a REIT based in Great Neck, N.Y. The third store, located at 1933 Main St. in Brockton, was purchased by Main Street Brockton LLC. All three locations were sold by an entity affiliated with Brockton-based Coffman Realty, a developer of retail properties in southern New England for over 20 years. This sale is a sign of continued investor interest in freestanding and long-term leased retail properties in the region.
Drug stores, supermarket-anchored shopping centers and other well-located small and mid-sized retail opportunities have also drawn the attention of 1031 exchange investors.
They may be more motivated to buy properties with low cap rates, but these properties must meet certain criteria. A deal has to have little or no risk and have substantial lease term remaining. Location can also be a significant factor and may lead to a difference of 50 basis points in cap rates.
It comes as no surprise that, despite the uncertainty of the U.S. economy and the ongoing credit crunch, quality retail real estate will continue to attract the interest of savvy investors.
Bob Tito is executive vice president and partner at Boston-based NAI Hunneman Commercial (www.NAIHunneman.com), a leading provider of commercial real estate services to corporations, institutions and the private market. Jonathan Aron is vice president at the firm.
