During the two year period of 2008-09, very little capital considered any retail assets. Retailers were leaving the arena (Circuit City, Linen’s N Things, Cost Plus) and consumer spending curtailed. However, in the fourth quarter of 2009, our institutional clients almost in unison told us of a “New Core Fund” seeking core retail assets, specifically grocery-anchored properties.
Historically, core retail properties have traded at a lower yield to core office and industrial properties. The primary reason was the investor’s perception—and in some cases this was justified—that core retail assets were truly unique in nature and provided for lower yield risk for invested capital. This perception assumed the other real estate asset classes (office, industrial and multi-family) are “commodity” type assets, subject to the supply and demand cycles in a given market.
Core retail is broadly defined as the best retail assets in the most desirable and stable retail submarkets. These select properties have the strongest anchor tenants (both in terms of credit and market share), successful shop tenants and significant barriers for new competition. The better retail market is broadly defined as areas with more discretionary income.
During the pre-recessionary/ pre-CMBS collapse days, the core retail definition included Lifestyle Centers (such as Woodbury Lakes/Arbor Lakes in the Twin Cities market); the target today is a center with the dominant grocery store in a given market.
Early in the year, the pricing for core retail assets will be inconsistent as buyers try to place money with minimal sales transaction data to explain the latest pricing to their respective investment committees. As the year progresses, more investors will lose the bid competition for core retail assets, which should create downward pressure on yields later in the year. What remains to be seen is if sellers will be willing to divest core retail assets.