Retail real estate might not be as talked about as multifamily, but that doesn't mean there isn't a lot going on. Though the sector has improved, there's still some uncertainty about the state of the tenant. Best Buy is closing 50 stores after an increase in pressure from discount stores and Amazon.com, and prior to that, Borders shut down its business.

With all of that, though, there are expanding concepts filling this vacant space. Several restaurant chains are looking for spots and many of the big-box discounters, like Target, are expanding into urban areas where they have never been before. Meanwhile, transactions are back. Class A retail properties and net-leased assets are trading at a premium and there's such a demand for space that retailers are considering repurposed space, making value-added transactions more attractive. At the same time, there is very little new space coming on line due to a lack of development. A team of retail experts breaks down what is happening in the market and lets us know what we should expect.

To View the Entire Article, Click Here

We all love a good party. The trick is knowing when it's time to head for home. The party called real estate in the years prior to 2008 claimed a score of revelers who littered the front lawn with the debris of their excesses—the faulty deals, the sketchy underwriting and the questionable loans that contributed to the biggest economic downturn since the 1930s.

Marcus & Millichap Real Estate Investment Services knew when it was time to head for home. The executive committee that made that decision admitted that their firm too got caught up in the froth of the decade but, embracing the vision of newly appointed president and CEO John J. Kerin, embarked on a journey of sorts to retrieve the standards upon which the company, now celebrating its 40th anniversary, had been built.

In the first years of the new decade, "if you could fog a mirror, you could make a six-figure income," says George M. Marcus, cochairman of the Encino, CA-based firm. "You could email your way to success," in a market that he believes had all but abandoned such concepts as client relationships, specializations and (in a way most important) accurate information. "And these were some of the principles upon which we founded the company in 1971."

To View the Entire Article, Click Here

George M. Marcus made a commitment to exclusive representation—an off-the-beatentrack idea at the time—when he founded Marcus & Millichap Co. in 1971. Today, M&M is the parent company of a diversified group of real estate service, investment and development firms. The company was reportedly the first brokerage to be on the Internet and it had the first intranet in the 1980s, which enabled internal cooperation. Marcus & Millichap is also said to be the first to integrate research into the decision-making process and transaction execution.

Outside of the firm, Marcus serves as chairman of Essex Property Trust, a publicly held multifamily REIT. He was one of the original founders and directors of Plaza Commerce Bank and Greater Bay Bancorp, both publicly held financial institutions. Marcus continues to serve on the board of directors of Greater Bay Bancorp. Included among Marcus' professional memberships are the Board of Regents of the University of California; the Apartment Industry Foundation, in which he currently serves on the board of directors; the Real Estate Roundtable; and the Policy Advisory Board of the University of California at Berkeley Center for Real Estate and Urban Economics. As for Marcus & Millichap, Marcus is taking it forward, announcing in 2010 that the firm would formalize its institutional platform and broaden its investment sales brokerage globally. "The world does not need another commercial services company without an effective strategy," Marcus told Forum last year. "The company was founded on the belief that coordinated marketing and a commitment to service add value."

To View the Entire Article, Click Here

Among the most frequently quoted authorities on the state of the market and macroeconomic trends is Hessam Nadji, managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Nadji has been the go-to guy for research since 1996, when he joined the Encino, CA-based company after serving as national director of research and information services for Grubb & Ellis Co. In his role with M&M, he oversees its research and advisory services, with the ultimate goal of supporting valuation, underwriting and development of specific investment strategies for the firm's brokerage clients. He is also the interim director of the firm's Institutional Property Advisors subsidiary. Nadji is regularly quoted in The Wall Street Journal, USA Today, Investor's Business Daily, Barron's, Financial Times, The Economist and Bloomberg Businessweek. He is a frequent guest on CNBC, Fox Business News, Bloomberg News and National Public Radio, as well as a regular blogger for GlobeSt.com.

To View the Entire Article, Click Here

Retail isn't nearly as big of a gamble as it was just a couple of years ago. That doesn't mean you should just throw $100 on black and expect to double your money, but the sector is certainly exhibiting some definite signs of improvement. Shopping center transactions are starting to pick up, many retailers are again rolling out ambitious expansion plans and retail REITs are far from showing any signs of distress.

But the sector, and the entire industry for that matter, still faces challenges. Unemployment, though improved, is still far from a pretty picture. The housing market hasn't returned in any monumental way, gas prices continue to rise and the country is seriously in debt. Natural disasters and geopolitical strife abroad are reasons for more uncertainty. All of these factors can negatively influence the consumer, which in turn puts pressure on retail.

Real Estate Forum, in conjunction with Marcus & Millichap Real Estate Investment Services Inc., recently spoke with some leading retail real estate executives to get their impressions on where the sector is headed.

To View the Entire Article, Click Here

Investors' renewed faith in the retail sector underscores the positive shift in sentiment toward commercial real estate since late 2009. Although many shopping center owners have endured high vacancies, weak consumer spending and a wave of store closures over the past few years, the latest NREI/Marcus & Millichap Investor Sentiment Index for retail properties has risen to 135, up from 68 in the third and fourth quarters of 2009.

What's more, the outlook for retail property values has climbed dramatically in the last few years. In the fourth quarter of 2009, nearly half of survey respondents (47%) expected retail property values to drop in the ensuing 12 months, with only 15% predicting an increase. Now those numbers have nearly flipped with 44% anticipating an increase, and only 9% forecasting a decrease in property values.

Overall, investors' increasing confidence in the U.S. economy and the commercial real estate recovery is fueling demand for assets across property types. The NREI/Marcus & Millichap Investor Sentiment Index has rebounded from a low point of 91 in the fourth quarter of 2009 to 164 in the second quarter of 2011. Nearly two-thirds of respondents (64%) plan to boost the size of their commercial real estate portfolios over the next 12 months, according to an online survey conducted between April 27 and May 11. The survey yielded 478 responses.

To View the Entire Article, Click Here

By Bill Rose
National Director of Marcus & Millichap's National Retail Group

Tax-deferred exchanges, which accounted for nearly 30 percent of investment sales during the industry's boom years, slowed to a trickle at the lows of the recession. Today—fueled by a renewed availability of capital—those deals are reemerging. In 2007, perhaps the frothiest year of the boom, $4.1 billion in tax-deferred exchanges were executed on 765 transactions nationwide. That velocity proved to be short-lived.

The subprime lending crisis led to a full-blown credit crunch that began to rear its ugly head during the first quarter of 2008. As a result, banks, conduits and other institutions shut off the capital spigot for all types of investments. Most significant was the near shutdown of the CMBS market, which accounted for almost half of all commercial lending during the first half of 2007. As a result, a high-leverage, speculative investment climate was replaced by a renewed focus on operations underwriting. Of the retail transactions that managed to secure financing and close during the global economic crisis, the majority were all-cash deals priced under $5 million. Many private investors were motivated to sell because of maturing loans, and a large percentage of these sales involved single-tenant net-lease deals because of the risk-averse nature of these corporate-guaranteed, credit transactions.

The improved capital market conditions have contributed to a normalization in commercial real estate investment. In 2009, investment sales totaled $104 billion on 19,367 transactions, a 10-year low. By year-end 2010, sales volume jumped more than 80 percent, to nearly $197 billion, or 24,030 transactions. As a result, 1031 exchange activity inched upwards in 2010, when more than $1 billion in exchanges were executed, or 231 deals.

In 2009, only $877 million in 1031 exchanges involving retail assets were executed. Tax-deferred exchanges involving retail assets comprised slightly less than 10 percent of the overall market in both 2009 and 2010, but that number is expected to increase in 2011 and 2012.

Outlook for exchanges

Today, private investors are encouraged—perhaps now more than ever—to upgrade or reposition their real estate holdings.

With proper guidance from a tax professional or attorney, well informed investors are utilizing the 1031 provision in the Internal Revenue Code, otherwise known as a Starker exchange, to meet the dual objectives of "trading up" to larger or higher-quality properties, while at the same time deferring capital gains taxes.

Prior to the recession, investors were commonly seeking to exchange from single-tenant net-leased assets to other single-tenant net-leased assets, whereas investors are now targeting apartment building to single-tenant asset trades.

Exchanging into single-tenant assets allows investors to exit more management-intensive properties for less-intensive assets with consistent yields and the credit strength of the income supported by office, industrial and retail single-tenant buildings.

In addition, last year's improvement in the capital markets has extended into 2011. Interest rates are also more favorable than they have been in a generation. Quantitative easing by the Federal Reserve and low inflation will keep interest rates range-bound between 3.5 percent to 4 percent this year.

Lender spreads will ease moderately, ranging between 200 basis points and 300 basis points, depending on property quality and capital source, down from 560 basis points at the peak of the crisis.

As 1031 investors exhaust their options in primary markets, they will increasingly seek out investment opportunities in secondary markets, especially credit-rated single-tenant and multi-tenant retail properties, a trend expected to emerge in the last half of 2011 and into 2012.

By Bill Rose
National Director of Marcus & Millichap's National Retail Group

Private investors are encountering a growing number of buying opportunities in 2011 as the capital markets begin to thaw, improving real estate fundamentals encourage more owners to sell, and banks clear their balance sheets of reclaimed assets.

In the retail sector, private investors account for the largest share of activity. Their share of total dollar volume may remain at reduced levels compared to recent years, as REITs and institutions aggressively compete for quality assets in an effort to place accumulated capital.

In 2010, private investors accounted for 32% of all sales over $2.5 million, down from 50% in 2009, according to researchers Real Capital Analytics and CoStar Group. However, private investors accounted for 70% of all the deals between $2.5 million and $10 million.

At lower price ranges, financing constraints have loosened and will continue to ease. Local and regional banks have become more active lenders, in addition to a few life insurance companies.

Financing for deals under $10 million typically involves five- to seven-year loans at 60% to 70% loan-to-value. While lenders shy away from lower-tier assets with weak fundamentals, the once-prevailing caution gripping the retail sector in the downturn has begun to clear.

As a result, more debt is available for performing Class-B assets, and even Class C-plus product, in strong locations. This includes healthy, well-located assets in secondary markets where capitalization rates remain more than 100 basis points higher than in primary markets.

The increase in available debt creates more opportunities for private investors as REITs and institutions dominate the market for top-tier properties in core metros. Less risk-averse investors with cash will find more distressed assets available in 2011. Last year, private investors accounted for most of the distressed property sales, or roughly 55% of all deals greater than $2.5 million.

Lower-Priced Deals Abound

Most distressed sales involve lower-quality assets priced at $10 million or less. Candidates for acquisition include newer properties built to serve failed housing developments in far-reaching suburbs and aging, high-vacancy shopping centers in less desirable locations.

Some of these properties could offer significant opportunities for investors with long-term hold strategies.

Larger properties in strong locations that encounter difficulties due to store closures or maturing debt, on the other hand, likely will remain top candidates for loan modifications or restructuring, limiting the number of high-quality REO assets coming to market this year.

The private investors dominate the single-tenant retail market, particularly for properties under $10 million. In the fourth quarter of 2010, single-tenant dollar volume rose dramatically to just 22% below peak levels during the boom compared to a 52% reduction in the multi-tenant sector.

Strong buyer demand for single-tenant deals has led to cap-rate compression in recent months, particularly for best-of-class deals, but returns in this segment remain well above the 10-year Treasury yield.

As of the first quarter of 2011, the average cap rate in the single-tenant sector ranged between 7.5% and 8%, while the 10-year Treasury yield fluctuated between 3% and 3.5%.

Investors still face risks. The retail market needs to evolve and reinvent itself amid backlash from the recession and an increase in online shopping. More consolidation and store closures are likely.

During the past year, retail sales less auto and gas increased by just over 5%, while non-store retailers saw a nearly 13% gain in sales.

Online sales still account for a relatively small percentage of all spending, but they will continue to climb in the years to come, undoubtedly having some effect on brick-and-mortar retailers and shopping center operations.