CBRE recently released their Cap Rate Survey for the second half of 2013, which highlights investment trends for all property types in each of the key markets across the US. This survey reflects the knowledge and collaboration of CBRE’s Capital Markets, Valuation & Advisory Services and Research Professionals who provided their estimation of current cap rate ranges in their local market. These cap rates are based on recent interactions that our professionals have had with active investors in their market.
CBRE reminds readers to “please keep in mind that these figures are estimates only, and actual cap rates for a given asset will vary depending on any number of extenuating factors”. CLICK ON THE IMAGE BELOW TO DOWNLOAD THE REPORT
According to some, cap rates have hit new lows by most measures. This means buyers are willing to accept less current income relative to the purchase price. Should we be worried? That depends.
Before we analyze whether there’s cause for concern, let’s first define a cap rate and the current drivers of the newly low rates. A cap rate is net operating income (NOI) divided by adjusted purchase price. For example, a property with $100,000 in NOI that sells for $1 million equates to a cap rate of 10 percent. There are several factors driving current cap rate compression. First, investors believe income will increase due to higher rents. Space availability continues to decline, aided by limited new construction; this, combined with positive absorption, means rent increases. Second, quality properties for sale are scarce. When they do come to market, brokers are reporting multiple initial offers and several “best and final” rounds. Availability of equity and debt is plentiful while quality properties for sale are not.
There are three main points that can help us decide the state of the cap rate and what it means for the real estate market in the future: the spread between a cap rate and risk-free rates, the fact that cap rates are “sticky,” and the average real estate income.
Spreads and rates
The spread between cap rates and risk-free rates is important for determining how much risk premium investors attribute to real estate. According to data from CBRE Econometric Advisors, the spread to the risk-free rate was 455 basis points (bps) in 2003 and 58 bps in 2007. The current spread of 357 is significantly higher than the 2007 market peak. This means investors are getting a higher yield from real estate assets relative to 10-year treasuries, a sign of a healthy real estate market. (NREI: Richard West) READ MORE…
The Amazon effect typically refers to the online retail giant’s global influence on retail and supply-chain dynamics. But more locally, it is also remaking the physical and demographic landscape of downtown Seattle.
Amazon has been at the center of the region’s tech boom and its growth has drawn migration to the urban core. From 2000 to 2012, the population of downtown Seattle grew by more than 26%(1), compared to 17% for all of Seattle and only 14% nationally.
Younger folks are driving much of this growth, as the downtown population aged 25-44 has grown four times faster (28%) than the metro average. With its estimated local workforce of 18,000 and potential to expand by an additional 22,000 over the next five years(2), the ramifications of Amazon’s expansion for the local CRE markets are acute.
A lot of attention has rightly been given to Amazon’s presence in Seattle’s office market. Its footprint now stands at 3.4 million square feet, accounting for nearly 75% of net CBD group absorption since 2011, and its growth shows no signs of slowing. Between projects underway, in planning, and leases yet to be finalized, Amazon’s downtown Seattle footprint could easily eclipse 8 million square feet by forecast’s end.
What’s more, the hiring associated with this business expansion will have just as dramatic an impact on the apartment and retail markets. (CoStar) READ MORE…
Average retail capitalization rates in the US declined in Q4 2013, settling at 7.08%. This is slightly below the 2005/2007 lows and nearly 200 bp lower than the 2009 peak. The data is from the CBRE Valuation & Advisory Services (VAS) database from 2003 through Q4 2013.
Spread over “Risk Free” Rates
According to Phil Voorhees, a Senior Vice President in the CBRE National Retail Investment Group, the cap rate trend is not surprising. First, a large number of higher quality grocery anchored centers and single tenant, triple net leased properties traded during the quarter, skewing the average down. Second, the spread to the risk free rate is attractive.
As an example, 10-Year US Treasury Bond yields ranged from about 4.5% to 5.2% from the end of 2005 through the end of 2007. Cap rates were in the low 7% range at the time, a rough spread of 200 to 275 bp. The 10-Year yields ranged from about 2.5% to 3% in 4Q 2013, a higher spread of 410 to 460 bp.
READ THE FULL REPORT HERE
Despite signs of an improving economy, observers of retail trends expect that more storefronts will close their doors this year as retailers adjust to demographic trends and the continuing popularity of e-commerce.
So far this year, RadioShack and Staples Inc. have both announced plans to close locations. The electronics retailer plans to shutter up to 1,100 underperforming stores, more than a fifth of all locations. Staples, meanwhile, intends to close 225 stores by the end of 2015, about 10 percent of its sites.
Both retailers cited declines in store sales as exacerbating factors, and Staples saw online sales increase last year. Quiznos, Sbarro and Ashley Stewart have all declared bankruptcy, incurring closings as well.
Those closings may be just a glimpse of what’s in store. Lake Success, N.Y.–based Excess Space Retail Services anticipates that retailers will announce upwards of 6,000 closings this year, says Michael Wiener, president. About 4,000 closings were announced last year, and retailers followed through on 2,600, he says. That didn’t include bankruptcies, which Excess Space doesn’t handle or follow. (NREI Online) READ MORE…
Staples to close 225 stores as sales move online
Staples will shut down more than 10 percent of its stores in North American by the end of next year, the second major chain to announce the mass closing of stores this week and the latest evidence of a retail landscape that is being altered drastically by the way Americans shop.
The nation’s largest office-supply company said Thursday that nearly half of its sales are now generated online and it is working aggressively to cut costs and become more efficient. It aims to close up to 225 North American stores as part of a plan to save about $500 million by the end of 2015.
It had already closed dozens of stores in the past year. Staples would not elaborate on the number of jobs that are being cut, nor the locations of stores that will close.
Staples has 1,846 stores in North America and Canada, the vast majority in the United States.
Staples, based in Framingham, Mass., reported adjusted earnings of $1.16 per share for 2013, well short of the $1.21 to $1.25 per share it said that it expected as recently as November.
Robert Edwards, president and CEO of Safeway, confirmed Wednesday that the grocer is in talks to sell the company. Safeway confirmed Wednesday that it’s in talks to sell the company, which has been the subject of persistent speculation.
Safeway has been in talks with private-equity firm Cerberus Capital Management for months, the Wall Street Journal reported Wednesday, citing people familiar with the matter. Cerberus also owns Albertsons.
Safeway is also seeking to cash out of its 49 percent stake in Mexican retailer Casa Ley. The moves follow the sale of Safeway’s Canadian operations and its Chicago unit, Dominick’s.
According to Edwards, Safeway recently generated its best volume growth year since 2006, and had its best identical-store sales growth in the last five years. Safeway is said to be on the shopping list of several potential buyers. (Bloomberg) READ MORE…
According to Wal-Mart CEO Douglas McMillon, Wal-Mart will open up to 300 of its smaller-format Neighborhood Market and Walmart Express stores this year, twice as many as originally planned. The retailer will also move forward with plans to open 115 new Wal-Mart supercenters, despite a weaker-than-expected outlook for the current quarter and year, and it will continue to invest aggressively in e-commerce. (ICSC SCT Newswire) READ MORE…
Nordstrom Inc. announced Wednesday that it will close its stores at Lloyd Center in Portland and the Vancouver Mall in Vancouver, Wash. Both stores will close early in 2015.
Lloyd Center is losing a high-profile anchor tenant just as the mall’s owner ramps up its rebranding campaign.The Portland shopping mall has had a Nordstrom location since 1960. The Vancouver Mall store has been open since 1977.
“These two locations just haven’t performed to the level we need them to and investing in remodels to possibly make them more successful doesn’t pencil out,” said Erik Nordstrom, president of stores for the Seattle-based company (NYSE: JWN). “We never like to close a store, but we came to the difficult conclusion that it doesn’t make good business sense to continue operating them after our agreements end.” (PSBJ) Read More…
Target may get a second store in Bellevue just east of Interstate 405 and downtown, property records show.
The store would be on a five-acre site at the southeast corner of 116th Avenue Northeast and Northeast Fourth St.
The three-story structure could have a ground-floor lobby, two levels of parking and a 150,000-square-foot Target store on the top level. The ground floor could also have another 15,000 square feet of retail space.
Northeast Fourth is a major arterial downtown, but after crossing Interstate 405, the road ends at 116th Avenue Northeast. The city is pursuing a plan to extend the street east to 120th Avenue Northeast, which would connect it to Best Buy and Home Depot stores.
Target currently has one location in the Factoria area of Bellevue. (DJC) Read More…