Third Quarter Retail Update

Video Index

00:00 Are we in a recession?
01:52 Just Sold! Shops at Grand Madison – 4.75% Cap
02:17 The Wall Street Journal’s good news about Retail real estate nationwide
03:49 Inland Empire Retail report
04:02 Progressive REP success in big box repositioning
05:21 Retail sales update
06:18 Is it a good time to sell?
07:13 Bonus clip! My son’s commercial on Amazon

Hello Investors!

Are we in a recession? By the strict definition of a recession, which is two consecutive quarters of negative GDP growth, the answer would be yes.
In the first quarter of 2022, the gross domestic product decreased by 1.6 percent, and in the second quarter, it decreased by 0.6 percent.

So, technically, yes, we are in a recession. But some people disagree, including the National Board of Economic Research, which is actually the group that makes the determination.

The main reason that many believe we are not in a recession is strong employment.
Unemployment numbers are at a record low of 3.5%. We’ve had 21 consecutive months of job growth.

But on the other hand, inflation is rampant, at the highest level in 40 years.  Many Americans can barely afford rent or to fill up their gas tank.
The stock market has performed horribly this year and the S&P is down over 20% on the year, about where it was in November 2020.

My opinion? Whether you choose to follow the strict definition of a recession or not, the reality is that interest rates are rising, stuff is getting more expensive, and there’s not much of a point in debating whether we’re actually in a recession or not.  Many economists think the worst is still ahead.  And how does this all affect commercial real estate?  Keep reading to find out.

Just Sold: Shops at Grand Madison

I recently brokered a sale of the Shops at Grand Madison. this is a three-tenant retail building located just half a mile from the beach in beautiful Carlsbad, California. The property is part of a mixed-use project with 11 luxury condos on top. This property sold for $4.475 Million which is a 4.75% cap rate. If you’re considering selling your property or are curious about what your property is worth, please reply to this email.

Good News in Retail Real Estate

The Wall Street Journal reported that the retail vacancy rate in the United States in the second quarter of this year fell to 6.1%, which is the lowest level in 15 years. Rents during the quarter were 16% higher than they were 5 years ago. And moreover, more stores opened than closed in 2021 for the first time since 1995.

Some analysts expect that trend to continue, and here are a few reasons why:

1. More companies that were originally online-only are shifting toward physical locations.

One of the leaders in this space is the eyeglass company Warby Parker, which now has 200 locations around the country.  And recently, Netflix announced that they will be opening their first retail location at the Grove in Los Angeles.

2. People want to go out more

After COVID let up, shoppers yearned to leave their homes again, so retail shopping and travel were up significantly in 2021 and early 2022.  It’s also interesting to note that online sales, which hit a peak of 16.4% of all retail sales in the second quarter of 2020, at the start of COVID, have scaled back to 14.3% in the first quarter of 2022.

3. Developers opting to renovate than build new properties

Supply chain disruptions and difficulties finding new construction workers found most developers renovating their existing properties rather than building new ones.  This leads to higher sales per square foot.

Inland Empire Retail Report

That’s what’s going on nationwide. How about what’s happening a little closer to home?
Locally, in the Inland Empire, we are also enjoying record-low vacancies, at 6.1%, which is, coincidentally, the same vacancy rate as the nationwide number reported by the Wall Street Journal.  The brokerage I work for, Progressive Real Estate Partners, is doing its part to get these vacancies filled.

I want to give a shout-out and congratulations to my colleagues Paul Galmarini and Paul Su, for completing a lease with Target.  Target will be leasing space in a former Kmart building right off the 10 freeway in Ontario, Their neighboring tenant will be Planet Fitness.  The former Kmart was 94,000 SF and that space will now be split, with Planet fitness already occupying 24000 SF, and Target taking 70,000 square feet.

This isn’t the first big box that the Progressive team has successfully repositioned.
In Perris, the team took a former Walmart and found three tenants to occupy the building: WSSHarbor Freight, and Fitness 19.

And in Riverside, at the Canyon Springs Marketplace, we replaced a former Joann Fabrics with BigLots, a former Bed Bath and Beyond with Nordstrom Rack, and are in the final stages of re-leasing a former Cost Plus with a well-known clothing company.

This goes to show that retail is ever-evolving, and a space that didn’t work for one retailer could be an excellent location for another.  Progressive is the leading retail leasing company in the Inland Empire, and I’m proud of my colleagues for the leases they’ve signed and the value that they have added for their landlord clients.  Let me know if you have a big box space that you could use some help filling, and I can put you in touch with the right leasing specialist who can help.

How about Sales activity?

After a record 2011, we are seeing some signs of slowing in the retail sales arena. Rising interest rates have made loans very expensive relative to where they were a year ago. The 10-year treasury, which is the benchmark that mortgage rates loosely follow, has crept up to over 4%, which is its highest level since 2008.  This means that buyers who are using loans to purchase commercial property aren’t able to pay the low cap rates of 2021 because they wouldn’t be making enough cash flow to cover their higher debt payments.

For lower priced single tenant properties. even though more of these properties are being purchased outright with cash, we are seeing many of these properties sitting on the market at 4.5 cap asking prices, whereas a year ago they would have sold for 4.25% cap rates.  As bond yields increase, the low cap rate investments don’t seem so attractive anymore.  Investors can buy treasury notes for close to a 3% return, which is almost the same asking cap rate as we’re seeing on some corporate ground lease drive-thrus.

It was a great Seller’s market…is it still one now?

In February, I made a video called “It’s a Great Sellers’ Market” where I talked about why, based on low-interest rates, low inventory, and low overall cap rates, it was a great time to sell your commercial real estate.   We’re definitely in a different place today with interest rates than we were 8 months ago.  You may be wondering if today is a good time to sell.  My answer is: if you have been thinking about selling your property sometime in the next two years, I do think that putting your property on the market now rather than later would be a smart move.  If you miss your window now, you may be holding on to this for another 7-10 years, riding out the next cycle.

While I don’t have a crystal ball, I don’t think that interest rates will be lowering any time soon, so I think there is a reasonable chance that your property could be worth less next year than it is now.

I don’t like to talk about negative news but I feel like I have an obligation to report things as I see them.

If you’ve made it all the way to the end of this email, thank you!  So here, I’d like to share a proud Dad moment and link to a commercial that my son was in for the Bentgo kids snack box.  You can buy it on Amazon!

I hope you enjoyed this week’s newsletter and learned something. Thanks for reading and I’ll see you next time!
Mike Lin, CRE