The past year has been an unusual time for investors in commercial real estate as COVID-19 has created an uncertain and unprecedented landscape.
Despite the chaos caused by the pandemic, the retail sector has been quite strong throughout the year as limited supply combined with investor appetite led to substantial activity in investment property. retail in the DC area. Of course, the pandemic has left its mark on the type of retail business that is successful and the way landlords and tenants approach rental.
Earlier this year, Chris Burnham joined KLNB, a real estate services and brokerage company, as principal.
Burnham, who specializes in the sale of shopping malls and net single-tenant leased assets, spoke with Commercial Observer about the Capital Region’s commercial landscape during this most unusual year and what’s up. wait for the next one.
What is your philosophy regarding the retail industry in the Washington, DC area?
I am personally optimistic about the retail industry in the Washington, DC area. Sales volume and interest in retail investments have increased dramatically over the past 12 months. We are seeing a limited supply and absorbing amount of demand for commercial investment property and there is a historically high level of capital circulating in the market which has contributed to the imbalance of supply and demand. This has resulted in a compression of cap rates in the retail sector and an increase in values.
What are the causes of the increase in value?
Some of the factors include low interest rates, proposed tax changes, and the attractive yield that some commercial assets, such as multi-tenant retailers, offer over multi-family or industrial buildings, which remain scorching. The low interest rate climate has helped continue to stimulate investment activity in the commercial real estate sector, but has pushed investors into retailing due to the attractive leveraged yields on certain markets. multi-tenant retail assets.
If you follow the market closely, you will notice that more retailers are in expansion mode than usual. There has been an abundance of new leases signed and new retailers setting up shop in the DC area. We expect this trend to continue through 2022 and this bodes well for the retail industry in the Washington, DC area. Overall, the region is poised for further growth due to the strong underlying market fundamentals.
How has the pandemic influenced or changed the thinking of the company in any way?
Like all asset classes, retail has had its fair share of challenges during the pandemic. Rather, it hastened the demise of retail concepts that were already struggling before the pandemic. In a way, COVID has made retailing stronger and new concepts have sprung from it. Business assets anchored in grocery stores and core single tenant assets such as drug stores, quick service restaurants and gas stations / convenience stores have exploded in terms of growth and demand from investors and lenders.
I think the pandemic has temporarily affected urban areas and therefore urban retail, but due to pent-up demand due to COVID, these areas keep coming back, and activity is clearly visible in all phases of development. commercial real estate throughout the Washington, DC area.
What changes have you had to make in the post-COVID world on the leasing front?
When advising a client on an acquisition, divestiture, or just the condition of their assets, it’s essential to examine each tenant in detail and understand their business to determine the overall asset value. Additionally, tenant sales have always been important to the value of an asset or the overall sale, but it has been even more of a major concern for investors and lenders in the post-COVID world.
What made you interested in joining the firm?
It’s important to note that one of the main reasons I joined KLNB was their dominance of commercial leasing in the DC and Mid Atlantic region. Retail sales and retail leasing have become more intertwined than ever due to the rapidly changing retail climate. A large part of my job is advising clients on their retail assets and the ability to add a strong broker or leasing team to the equation will allow me and KLNB to add more value to our customers.
What areas look strong right now and what is slowing down?
For multi-tenant [assets], malls anchored in grocery stores, neighborhood malls and tenant credit malls; for single tenant restaurants, quick service restaurants or QSR assets, pharmacies, medical retail such as emergency care and convenience stores / gas stations to name a few.
As for single tenants, the sit-down restaurant category has been challenged but is making a comeback. Investors view this category as a performance game and some tenants perform well, making it a relatively safe investment. Of course, real estate fundamentals and sales play a big role in these acquisitions or disposals. The multi-tenant retail businesses that have been affected are said to be secondary and tertiary multi-tenant assets whose tenants were more susceptible to the pandemic. Again, most assets and tenants have rebounded from this ‘slowdown’ but still have higher returns due to the perceived risk the pandemic has placed on these properties.
What challenges currently exist for investors?
For capital looking to invest, the amount of inventory has been a challenge. Although inventories rose in the third and fourth quarters, there is still more demand than supply of assets in the Washington, DC and mid-Atlantic area.
What do you think are the major trends in the DC region in 2022?
Investors are bullish on retail centers, both anchored and unanchored, based on the comparative performance of other asset classes. Unique tenants nationwide and in the DC region are in high demand due to the security and reliable income stream these assets provide.
There are a lot of deals looking for capital; many “new buyers” in the market in combination with your known and / or institutional investors will continue to be active.
Low interest rates continue to stimulate investment activity in the commercial real estate sector, but will continue to push investors into retail due to attractive leveraged returns. Investors are still weary of some single tenant concepts, such as sit-down restaurants. However, we have even seen investment activity, and prices will continue to rebound here.
How would you characterize the year we have just lived?
For a majority of 2020, the retail investment sales market has been slow, particularly on the multi-tenant investment sales front. Single-tenant and multiple-tenant sales started to increase towards the end of 2020. If you look at the numbers, the bulk of transactions took place in the fourth quarter of 2020, or December of that year. Since then the market has really accelerated, values have risen and demand has skyrocketed for all retail assets.
Additionally, most tenants and landlords worked with deferred rents and cleaned up their accounts receivable balances, making assets more deliverable throughout 2021. Lenders were starting to get aggressive towards the retail business towards the end. of 2020 and this trend continued into 2021. Over the past year, we have seen a squeeze in cap rates for most of the retail industry, both single-tenant and multi-tenant. As mentioned, we have seen the demand from investors increase, but the supply has not increased at the same time. This is one of the reasons for the compression of the capitalization rate that we have observed. Over the summer, stocks started to rise, but competition remained fierce, maintaining a healthy market.
Keith Loria can be contacted at [email protected].