Quality Counts
Jul 1, 2007 12:00 PM, By Jennifer Popovec
The value of a grocery-anchored center is increasingly dependent on the quality of the anchor, with centers anchored by the number one grocer in a given market trading at cap rates far below other centers.
“It really comes down to the strength of the anchor and having the right supermarket in the center,” notes Latella, who was involved in appraising New Plan Excel Realty Trust when Australia-based Centro was doing its pre-acquisition due diligence. He estimates that cap rates for class-A grocery-anchored centers are sub-6 percent.
“Core assets — the ones that have no hair — are selling for very aggressive cap rates,” says Joe French, managing director of Sperry Van Ness. “We see some deals in the New York area trading at cap rates as low as 5 percent.”
On average, grocery-anchored centers were trading at a 6.7 percent cap rate at the end the first quarter 2007, down from 6.99 percent at the end of 2006, according to Real Capital Analytics. The price per square foot increased to $162 per square foot from $156 per square foot over the same period. In 2005, the average cap rate was 7.4 percent and the price per square foot was also $156.
Even a center in a small market can generate a lot of institutional interest as long as it's anchored by a leading grocer, says Jon Wheeler, president of Wheeler Interests, a Norfolk, Va.-based owner and developer. The firm, which owns 26 shopping centers in nine states, has been a net seller over the past 18 months. Currently, it has two properties under contract — one in Houston and one in Richmond, Va.
The Richmond asset, Brook Run Shopping Center, is anchored by a Ukrops, an organic food store similar to Whole Foods Market and a market leader in the city. The center is under contract to a New York-based REIT, Wheeler says, and will trade at a 7.25 percent cap rate. “This anchor really commands a premium,” he explains, adding that it was initially listed at a 7.5 percent cap rate.
Power centers are also popular. Real Capital Analytics' most recent data shows that power centers were selling for $122 per square foot at the end of 2006, an increase of 4 percent over 2005. The centers traded at an average cap rate of 6.32 percent, 70 basis points lower than the average in 2005.
Cushman & Wakefield's Latella confirms that institutional quality power centers are trading at cap rates in the 6 percent range, about 50 to 75 basis points lower than the first half of 2006. However, lower class power centers have seen their value degrade slightly because they lack a concentration of credits and are vulnerable to overbuilding.
Krasner sold Chatham Plaza with top notch credit-tenants in Savannah, Ga. to Kimco. The center, which is located right across the street from a General Growth Properties mall, received 15 offers, he says, with cap rates ranging from 6.3 percent to 6.75 percent.
Like power centers, lifestyle centers are increasingly attractive to investors, although they don't trade as frequently as the other retail property types because of a lack of inventory, Latella notes. At first, investors were leery of lifestyle centers, and as a result, they had higher cap rates than power centers — about 50 basis points higher.
Now, lifestyle center values are consistent with power centers, with cap rates for the best lifestyle centers ranging from 5.75 percent to 6.25 percent, Mason says. He was recently involved in the sale of a lifestyle center in Birmingham, Ala. that had sales per square foot of $350. It sold to an offshore investor at a cap rate just below 7 percent, providing a decent yield since the buyer 5.5 percent note.
However, Mason speculates that had the interest rate been higher, the lifestyle center would not have achieved the pricing it did.
Looking forward, buyers and sellers will probably see even greater separation in pricing between asset classes, according to Padanilam. He predicts that cap rates for clower class properties will soften another 25 basis points by the end of the year.
It all depends on interest rates, French says. “I really believe that if interest rates hadn't moved, the cap rates wouldn't have budged because retail fundamentals are still good,” he notes.
But, all bets are off if 10-year Treasuries move above 6 percent. “If rates move up to that level, I would expect to see cap rates creep up to 9 percent or even 10 percent,” French forecasts. “Otherwise, deals just won't sell.”
French says the looming threat of higher interest rates has made him nervous about several deals he's working on right now. “I have two shadow-anchored properties available in Ohio right now, and the activity is slow because the increased interest rates have eliminated a lot of buyers,” he notes. “I am concerned that we won't be able to achieve the pricing the seller would like. We might even find ourselves in a buyer's market in a few months.”
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007* | |
|---|---|---|---|---|---|---|
| Properties sold | 127 | 117 | 110 | 108 | 76 | 28 |
| Sales Volume | $10.7 billion | $8.4 billion | $5.8 billion | $8.5 billion | $5.0 billion | $2.0 billion |
| Square Feet Sold | 99,862,404 | 75,699,777 | 60,240,204 | 65,156,241 | 44,281,018 | 11,319,539 |
| Average $/sf | $107 | $111 | $96 | $131 | $113 | $176 |
| Average Cap Rate | 9.40% | 8.60% | 8.40% | 7.90% | 7.40% | 7.20% |
| *Year To Date Source: Real Capital Analytics |
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