Changing consumer demands and uncertainty over rents and vacancies have hampered investment in the retail real estate market over the past two years, but low interest rates could help in 2013, one of the Twin Cities' top brokers says.
Robert Pounds, senior vice president for investment services at Minnetonka-based Colliers International, told members of the North Star Chapter of the Appraisal Institute and the Institute of Real Estate Management this week that retail and other types of commercial real estate now look favorable.
That's especially true because of short-term interest rates, which the U.S. Federal Reserve said last month it intends to keep near zero until the national unemployment level drops below 6.5 percent.
"Most investors, even institutional investors, are going to take advantage of debt that's low," he said. "If it's cheap, why wouldn't you? It improves your yield. And I think that the interest rate level is going to remain low."
The cost of capital for banks to lend money is essentially nonexistent, Pounds said, "So they can go out and lend money on a short-term basis at 3.5 to 4 percent interest rates, and that will keep the investment environment pretty active."
Buyers, however, have been hard to come by in the Twin Cities' retail scene in recent years, which was hit hard by the recession and has been one of the slower sectors to recover.
Vacancies soared from a low of 3.6 percent in 2007 to a peak of 7.3 percent in 2010 as the effects of the financial crisis took hold. Since then, some gains have been seen. Colliers pegged the third quarter 2012 Twin Cities retail vacancy rate at 6.4 percent with rents landlords are asking rising in some sectors, especially quick-service restaurants.
But sales of retail buildings in the Minneapolis-St. Paul market have been "anemic" in each of the last two years, Pounds said, with slightly under $500 million in activity last year -- 8 percent lower than 2011. That is down 64 percent from the pre-recession year of 2006.
"There wasn't much retail investment activity in 2012," he said. "The darling of the retail investments has and will continue to be grocery-anchored shopping centers. But there are some telling things going on in the grocery industry that we should be aware of."
With big-box retailers such as Wal-Mart and Target taking big chunks of the grocery market share at the expense of traditional sellers such as Supervalu and Cub Foods, investors are becoming more wary of the long-term viability of the neighborhood centers.
Probably the most interesting retail transaction of the year, he said, was the sale of the Galleria shopping center in Edina from longtime owner Gabbert & Beck Inc. to Hines Global REIT for $127 million. The sale of one of the top "lifestyle centers" in the country was private and wasn't offered to the broader investment market, but is indicative of what a sought-after property can fetch in the Twin Cities.
Another example from the past year was the sale of the two Riverdale Village centers in Coon Rapids from the Australian retail fund giant Macquarie to U.S. hedge fund manager Blackstone for a combined $97 million, or $124 per square foot.
The capital available for commercial real estate sales is "vast and untapped," but buyers are being very selective, especially with retail properties, where the cash flows and rents paid by tenants are being closely scrutinized, the veteran broker said.
There's a continuing gap between buyers who are looking at the rents they're likely to achieve under current market conditions and sellers who may now be receiving rents higher than that.
"What a buyer is going to do is adjust those rents to the market when the leases expire," he said.
Don Jacobson is a freelance writer in St. Paul.