Retail transaction volume was strong in January as the shorter 2019 holiday season created a tight window for year-end closings, residual transactions pushed into the New Year and gave 2020 an early jump on what should be another great year. Total transactions in 2020 should continue to build from the big start. The massive transaction volume from the second half of 2019 — more specifically, a glut of fourth-quarter sellers — has produced a wave of investors needing to complete 1031 exchange purchases in the second and third quarters of 2020. By comparison, 2019 featured a slower than typical start due to a combination of elevated interest rates and residual investor hangover from the equity markets debacle of the fourth quarter of 2018.
Jimmy Slusher, CBRE
Our sense is that 2020 will benefit from enormous velocity, driven by private investor demand and seller willingness to meet market expectations in favor of quicker transactions as fears of the late cycle, election turmoil and international unrest grow. Further evidence of seller’s alignment with market expectations, trailing available data has shown the asking price to sale ratio narrowed from nearly 12 percent in first-quarter 2019 to 3 percent in fourth-quarter 2019. This brought the bid/ask more in line with the previous three years bid/ask trend, signaling sellers were pricing assets closer to purchaser expectations and fueling volume to close out last year.
Heading into 2020, purchasers are creatively looking for late-cycle opportunities. An example of one such transaction, CBRE NRP-West completed the sale of LINK OC in Anaheim, a 23,626-square-foot strip center with a recent full-exterior renovation and new tenants throughout. Formerly known as PacifiCenter, the strip center portion of LINK OC represented a small retail component of a larger multi-use campus project situated at the hard corner of Tustin and La Palma avenues. The property was acquired, rebranded and entitled for 400-plus apartment units, in addition to renovating the existing office, hospitality and retail components. Due to cycle timing and the timing demands of the larger project, the retail component of LINK OC was marketed at 82 percent occupancy, despite the leasing momentum that might have fully stabilized the property in six to nine months. Potential investors, looking to benefit from the pre-stabilization sale, were eager to assume the remaining lease-up. The resulting demand ultimately drove a 3 percent price premium over the seller’s asking price of more than $12 million from an original pool of 10 buyers. All bids were from private investors local to Orange County, with only a few working toward a 1031 exchange.
From a core asset perspective, another example of investor opportunity would be our sale in January 2020 of Crenshaw Plaza in Los Angeles. Anchored by Ralphs Grocery and Rite Aid (not part of the sale), the 91,723-square-foot shopping center is adjacent to the nearly complete LAX/Crenshaw transit line. The asset was priced at a spread above core yield as a result of the pads and parcels within the center not being part of the sale, which disqualified it from a pure core designation. However, with the grocery store being part of the sale, density of the trade area and transit-oriented real estate made the offering especially interesting to a variety of investors. Among the many bidders were private 1031 exchange investors, infill multifamily developers and traditional REIT buyers. Ultimately, the final bidders pushed pricing over the $29,781,000 list price with accelerated deal timing. The seller enjoyed a choice between multiple well-qualified buyers on what would be a relatively short transaction compared to deal size and complexity.
As with LINK OC and Crenshaw Plaza, we expect 2020 will continue to produce aggressive demand for late-cycle opportunity or just off-core grocery-anchored properties. Pricing is expected to remain stable across all Orange County retail, comparable with last year’s yields; 73 percent of transactions in 2019 had a cap rate between 4 percent and 6 percent. Demand in Orange County will continue from local investors transferring
equity or cashing out of lower yield sale opportunities (apartments, industrial) into less management-intensive, higher-yield retail assets. With an enormous investor base around Southern California, the greatest liquidity will always reside in the sub-$4 million price range, as demonstrated in 2019 with 55 percent of transactions occurring between $1 million and $4.4 million in deal size. This year has jumped off to a strong start and will continue the consistent velocity Orange County has enjoyed over the past few years.
— By Jimmy Slusher, vice president, CBRE National Retail Partners — West. This article first appeared in the February 2020 issue of Western Real Estate Business magazine.