RITTER: Let’s discuss cap rates. Is there an overheating in
the market for class A and single-tenant assets?
FRUMKIN: Obviously too low means different things to different
people, but what we’re seeing is that single-tenant, grocery-anchored centers are trading at much lower cap rates. This is
because the investment community sees grocery-anchored centers as a stable and low risk investment in comparison to centers
occupied by more discretionary retail businesses. This is based on
three key metrics. First, grocery stores attract shoppers to the
center on a consistent basis, sometimes two to three times per
week. Second, grocery stores are typically considered to be noncyclical businesses. And third, grocery stores to date are not experiencing much sales leakage to the Internet. Grocery-anchored
centers therefore provide a hedge to investors. The consumer
needs to eat whether or not the economy is good or bad. And, so
far, online grocery concepts have been difficult to implement and
have not been very successful. As long as these metrics remain,
cap rates for single tenant grocery stores or grocery-anchored
centers will remain low.
ROSE: In New York City, we’re underwriting a number of retail
condos, and many of these deals are trading as though they were
core, meaning a 20-year credit tenant as though the lease were in
place, even though the tenant is not yet identified. When you
think about price per foot, it’s generated by the exceptional rent
that Manhattan has always been able to drive. We’re from $300 to
$600 per square foot, and these are capping out in the 4% to 5%
range! The single-tenant net-lease world is continuing to deliver
quality product. There is an insatiable demand for single tenant
net-leased investments and it’s now attracting foreign capital in
major markets like Florida, New York and Los Angeles.
SEHGAL: When we look at the net-lease markets, we’re looking
at the cap-rate compression as a result of two factors: the availability of financing and the buyer looking for product, especially for a triple-net product that minimizes any sort of management or headaches that are typically associated with owning
commercial real estate.
We’re also still seeing a drastic shift in the overall economy,
where the alternative investments such as CDs and the other
“safest” types of investments are no longer providing yields to
investors. You also have 10,000 individuals every day hitting
retirement age, and there will be a demand for yield. There’s no
question we’ve seen significant cap rate compression, an
increase in real estate values to the point where triple-net assets
in particular are trading at higher price points than they were in
COHEN: We are seeing a tremendous amount of capital chasing
the deals. We haven’t really seen so much rate compression that we
can’t support it on a loan. But I am seeing aggressive competition
for the retail throughout the Mid-Atlantic and the Southeast, especially in growth markets
RITTER: Is competition for B centers heating up as well?
COHEN: I’ve seen a lot of those deals come across my desk, and
we’ve been successful in financing a lot of them. If the asset has a
good tenant mix, location and a strong borrower, we will find a way
to make the deal happen.
SEHGAL: We have about 40 shopping centers in our portfolio
spread across the United States. Some of them are in secondary
and tertiary markets, and we see an increase in demand for them.
A large part of that goes back to the lack of supply, and part of that
goes back to the cap-rate compression for class A. Investors are
chasing yield and realizing that if the demographics aren’t that different, they are choosing a secondary rather than primary market
and can underwrite based on most of the factors that we would
look at—lease term remaining, probability of renewal and the
credit quality of the tenant. We are starting to see cap rates compress in those markets, but only since late 2013.
Since we have the ability to raise capital for a variety of funds at
the same time, we have always looked at secondary markets because
there has been more opportunity. But now since the secondary and
tertiary markets are seeing such an increase in demand, we’re also
looking at how to be creative and innovative. We’re even expanding into other asset classes such as medical office and storage and
figuring out other ways to create value.
PHILLIPS: We have not been focused on the coastal regions. We
are looking for properties where there is good, solid growth over a
sustained period. We’ve been doing it for a long time privately
through a lot of different funds. When we started out, we did
mostly opportunistic properties and a lot of them were in secondary markets.
Today, our largest fund is the non-traded PECO-ARC fund, which
has about 120 centers and specializes in stabilized grocery-anchored
assets. Those can be distributed throughout the country. We look
for solid sales, the number-one grocer in the market, and if they
happen to be in the Los Angeles area, Phoenix, Dallas, Houston or
any of those areas, we like that, but we’ve always bought a number
of things in the Midwest, Southeast and Mid-Atlantic states.
ROSE: It’s good to see the middle market start to blossom. As we
came out of the recovery, everyone wanted to invest along the
coasts, and then yields compressed, so investors today are now
pursuing yield in the middle markets. That means Denver’s a
“If you don’t keep up and
meet customers’ needs, you
probably won’t be around
very long. That’s what’s
happened in the migration
toward specialty grocers.”
MICHAEL C. PHILLIPS
Phillips Edison & Co.
“We continue to see
retailers and a select few
Sprouts Farmers Market