After Three Years on the Brink, Retail is Set to Recover in 2011

If you need a sense of how the retail real estate market has changed over the past 12 months, all you have to do is take a close look at a deal that Faris Lee Investments, an Irvine, Calif.-based retail investment brokerage firm, closed this fall. The sale involved a recently completed project in Corona, Calif. The center is anchored by a Van’s supermarket, but most of the shop space has never been filled. The center is located in a growth area, and Rich Walter, president of Faris Lee, estimates that it will likely take from two to three years to lease the vacant shops. Yet the buyer was happy enough to get a property with a grocery anchor to close the deal at a 6.5 percent cap rate on the current income stream. “It’s a risky transaction because you are trying to forecast when the rental market will come back in a market where you don’t see it,” Walter says. “It’s not that it’s not going to be leased at some point. The question is when. But they are happy enough with the return to be willing to sit on it over time.” Back in 2009, this kind of logic would be unfathomable to most industry insiders. But as a result of the record low interest rates and increasing liquidity in the market, real estate investors can suddenly afford to gamble. When debt is priced at 5 percent, it’s possible to accept cap rates in the 6 percent to 7 percent range, notes Dan E. Gorczycki, managing director in the New York City office of Savills LLC, a real estate services provider.

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