Cincinnati's Retail Market to Have a Great Run

Single-tenant assets have never been more popular among private investors as evidenced by cap rates that have fallen to levels that would have amazed most industry watchers in 2007. Cap rates have compressed to the point that some long-term ground leases are trading in the mid-4 percent range, while best-of-class fee simple property yields begin 100 to 150 basis points higher.

A number of investors are targeting single-tenant, net-leased assets with lower-credit tenants or leases that will expire in the near future with the potential to re-sign or re-tenant the property, trading at yields starting in the 6 percent range. In the multi-tenant segment, investors are scouring the market for grocery-anchored deals, though limited supply will hinder transactions.

Value-add plays are popular with private buyers across the metro area, providing owners in low-profile submarkets the opportunity to cash out while increasing occupancies and rent growth will provide upside for buyers.

The median price of assets sold during the past four quarters jumped 48 percent to $153 per square foot. Sales of fast-food and restaurant properties traded at $300 per square foot, while drugstores sold as high as $375 per square foot.

Single-tenant properties traded at cap rates averaging in the high-7 to low-8 percent range. Initial yields for fast-food chains, such as McDonald’s, started in the 5 percent range, while properties with near-term lease expirations changed hands approximately 100 basis points higher.

Rush for Multi-tenant Assets

The big story has been the acceleration in the multi-tenant retail market. Cincinnati multi-tenant sales transaction velocity was up 122 percent from 2011 to 2012, and that trend appears to be continuing into 2013.

Availability of cheap debt, improving property-level fundamentals, and the return of “arm’s length” market sale comparables have all served to bolster the strengthening multi-tenant retail market in the region.

Through the recession, most of the active buyers in the market were targeting larger properties at lower price points (also known as “buying by the pound”) which accounted for a net decrease in the average price per foot of the properties that were trading. Now that the market has normalized, there is once again buyers for the full spectrum of retail assets, ranging from the severely distressed to the brand new, Class-A centers.

Though cap rates have fallen in recent months, the spread between cap rates and lending rates are still some of the widest in the history of the industry, which is equally beneficial to buyers and sellers.

Perhaps the best indication of the strengthening of the market is the fact that several developments that had stalled during the recession now have strong leasing momentum and are signing deals with major big-box retailers like Kroger, Dillard’s and Dick’s Sporting Goods, as well as a host of other national and small-shop nationals and regionals.

The construction of a 14-screen theater began late last year in the mixed-use Oakley Station project in central Cincinnati. Plans are also under way for a 145,000-square-foot Kroger Marketplace, the largest in Ohio, to anchor the center. Oakley Station will include 225,000 square feet of retail space, as well as 300,000 square feet of office space and 302 residential units upon completion in 2015.

Additionally, the first phase of Austin Landing, along the Cincinnati-Dayton Corridor, is in progress and developers are waiting for significant lease commitments before moving forward with construction of each building. TJ Maxx and HomeGoods recently signed on as new tenants, occupying 45,000 square feet combined.

However, the development could receive competition from the nearby 1.3-million-square-foot Liberty Town Square coming on line in early 2015. The increased traffic resulting from these large developments will bode well for retailers in nearby shopping centers, attracting new stores to backfill vacant spaces.

Job Growth is the Catalyst

Much of the new construction can be pinned to improving fortunes in Cincinnati’s employment base. While the local economy was flat in the past year, job growth did accelerate in the second and third quarters of 2012, and some 1,200 jobs were created in the first three months of 2013.

Cincinnati employers are expected to increase staffs by 17,000 positions this year, a 1.7 percent gain. In the prior year, an increase of 4,700 workers grew payrolls by 0.5 percent.

Manufacturing, trade, transportation and utilities, and leisure and hospitality will see growth ahead after previous losses.

This employment trend will spur rising demand for space in the metro area through the year as retailers seek space in high-growth areas.

As a result, vacancy is expected to fall to 14.3 percent, a 90-basis point drop from 2012. This follows a decline of 70 basis points last year.

As retail vacancy reaches a five-year low, asking rents for available space will begin to gain upward momentum. Average rents for marketable space are forecast to rise 1.3 percent to $10.01 per square foot this year. In 2012, asking rents for available space fell 4.6 percent.

It’s worth noting that the market has gained about 93 percent of rent levels in place prior to the recession.

Retail sales in the metro area increased 4.8 percent during the last 12 months, surpassing the national annualized growth rate of 3.7 percent. The rise in consumer demand has fueled job creation in the retail trade and other service sectors, as companies expand to meet greater workloads.

Overall, the market is strengthening on all fronts and seems poised for another strong run. Although 2006-2007 may remain the high-water mark for the region, the market seems to be closing in on another peak in the cycle.

— Joel Dumes and Stanton Falk, vice presidents of investment for Marcus & Millichap