To say 2017 started off slow would be a bit of an understatement. A total of just 50 retail CRE sales took place in our region during the first two months of the year.
The average for any other two month span in 2017 was 70. In fact, when looking back on any Dec-Feb period, Dec 2016 through Feb 2017 produced the lowest transaction volume we had seen since 2012-2013. Some may point to an election year, others to initial interest rate reactions.
Looking back now, it was only a minor hiccup in an otherwise record-breaking year that saw over $700M in single-tenant transactions alone. The average closing cap rate across all retail property types compressed only slightly (3 basis points) but fared far better than most other regions across the U.S. which are reporting increasing cap rates and decreasing transaction volume. With regard to general valuation, at just 3 basis points, 2017 marked the smallest decrease in cap rates we’ve seen since 2011. For some historical context, the average decrease in cap rates from 2011-2016 was nearly 30bps per year.
While we know it’s nearly impossible to predict market cycles, it appears, in terms of retail cap rates, that we’ve reached the peak. It would be hard to imagine after a fairly obvious plateau that we will see any sort of prolonged period of cap rate compression in the next couple of years. Keep an eye out for our mid-year report (July) where we will have a much clearer picture of 2018 metrics.
Grocery & Power Centers
Bifurcation in the Pacific Northwest’s institutional retail investment market has become a stark realization. The demand for core products remains exceptionally high and in places like Seattle, Portland and Bellevue, record cap rates prevail. As you travel further from the urban core and start introducing suburban box risk, that demand has certainly leveled out when compared to 2014-2016. The number of $10M+ shopping center listings in Pacific Northwest that have either expired or continue to sit on the market is the highest we’ve seen since we started tracking this information over a decade ago. Pricing expectations certainly play a role in a changing market and after 7 straight years of cap rate compression it’s easy to understand why a gap may exist. In 2018, we expect those expectations to align more accurately as the market is speaking for itself.
2017 ended with a record 123 unanchored retail sales in OR/WA, up 7% from the previous record set in 2015. Transaction volume nearly hit the $600M mark and will go down as the 2nd strongest year in that regard. For the first time in 7 years, cap rates have finally plateaued. There was a nominal 1 basis point increase over 2016; in comparison the average YOY decrease since 2010 has been nearly 50 basis points. Similar to other product types, a significant spread between asset classes has taken shape. Newly constructed unanchored sales or those with national credit tenants sold at an impressive 112 basis point premium. We expect that trend to continue in 2018.
Single Tenant Retail
At the start of the year (and in 2016) the “experts” predicted single-tenant cap rates would start to rise after several years of compression. And for the 2nd year in a row, they were wrong. The 130 single-tenant sales we tracked in OR/WA produced an average cap rate of 5.65%, down another 10 basis points from 2016. What’s more impressive is that for the first year on record, transaction volume eclipsed the $700M mark, the previous record from 2015 was under $550M. The average single-tenant sales price in 2017 was $5.4M, a 30% increase over 2016 and also easily a record. These figures will be tough to match in 2018 but it’s far too early to predict what to expect in the larger scope. Case in point, by the end of February 2017 total single-tenant sales volume stood at only $66M, or just 9% of the ending total for the year.