Commercial retail is holding steady with high prices, low cap rates and unceasing demand for properties characterizing the first quarter of 2004. The market has been consistently strong in recent past and has shown no signs of slowing down.
“Prices are through the roof,” said Adam Mancinone, a retail specialist with Marcus & Millichap in New Haven. “And cap rates are falling and sustaining levels as low as the mid to high 6s. It’s quite unprecedented.”
He cited that two Walgreens were recently on the market, one in New Britain for a cap rate of 6.9 percent and one in Monroe for a cap rate of 6.6 percent. Though numbers had yet to be released for the quarter, he believed they were “up a bit” from the fourth quarter of last year.
“There is such a competition for properties,” said Tim McNamara, a commercial real estate broker with Farmington-based SullivanHayes Cos. “If there is product available it’s selling very quickly, has multiple offers and at aggressive cap rates.” As an example, he said that shopping center space is now leasing for an average of over $250 per square foot and that cap rates are around 7 percent for free-standing single-tenant lease buildings.
“It used to be that cap rates in the single digits were for enclosed malls, but now unanchored strip centers will see numbers in the 6, 7, 8 percent cap range,” said Eric Litsky of Listksy Assoc., a brokerage in Simsbury.
Jim Fagan, the manager of Cushman & Wakefield’s Stamford branch, is seeing high-end retail renting for between $70 and $80 a foot, noting that these days, “retail is good.”
One of the main factors contributing to the soaring cost is the lack of other investment opportunities and continued backlash from the effects of Sept. 11.
The lack of property availability has driven prices even higher. “The strong demand is driven by the amount of open space,” said Fagan. “In building spaces for places like Target [in Fairfield or Startford] and Walmart [in Downtown Stamford] buildings are being torn down in order to accommodate. In terms of existing space it’s very limited,” stated Fagan.
“Basically all the capital is chasing real estate because there are no other viable options,” said Mancinone. “People are still skittish with the stock market and real estate is a bit more stable Â… more tangible.”
The lack of space, combined with continuing high land prices and difficulty in attaining approvals, perpetuated Connecticut’s predominant infill market, according to Litsky. “There are great opportunities for infill to come to older centers and re-tenant them. That has become more of a trend and adaptive reuse of properties will continue to increase,” he said.
According to Mancinone, the historically low cost of borrowing money and usage of 1031 Exchanges also contribute to high prices.
During this quarter, throughout all types of retail space, it has become evident that “sellers understand that their properties are real commodities,” said McNamara. “If there was ever a time to sell, these [prices] are as high as they’re going to get.”
The past quarter has seen continued construction and activity, particularly in downtown Hartford and New Haven, which have both experienced a recent resurgence in retail redevelopment, according to McNamara. With a significant amount of growth in residential real estate, merchants are flocking to those growing areas “to capture weekend and retail markets that have grown because of housing increases,” he said. “For a long time people have escaped the cities and now there is a yearning to get back to them.”
In Hartford two major Downtown developments are underway, the Front Street project of Adriaen’s Landing and the Town Square development, which will serve to saturate the space starved market. Front Street will provide 200,000 square feet of retail area to Downtown and is scheduled to open in mid-2005. Town Square is a 1-million-square-foot project that includes retail space, apartments, offices, parking and a new public gathering space; it is slated for completion in the second quarter of 2006.
The South Rises
Though places like Fairfield County have experienced little activity in the past months, there has been some recent growth in the southeastern portion of the state, particularly in and around Waterford, where the Crystal Mall was recently built and is almost fully leased, according to McNamara. “A lot of national players are reporting good sales,” he said. “It’s having an economic resurgence and retailers are trying to get in to capture the growth.”
An alternative to the traditional mall set up is occurring in South Windsor and Canton, which are new entries into the market according to McNamara. There strip centers with high-end typical mall tenants are being set up in village concepts, which “will be the future for a lot of people trying to experience growth that can’t find it in traditional malls,” he said.
This trend has made room for smaller businesses that are trying “to find a way to survive the onslaught of larger big boxes,” said Litsky, who noted an increased amount of activity from local tenants in the past months.
The high prices and low cap rates of the last quarter are producing “numbers that a few years ago would have been hard to comprehend,” said McNamara, who also believes that “cap rates are a bubble that can’t continue without bursting.”
Perhaps this will come once the presidential elections are over and there is “uncertainty in the air,” said Mancinone, causing low interest rates to rise and prices to recede to a more typical level. Until then, “everyone is trying to figure out where the top is,” he said.
Even if the political arena does affect the industry, its future does not seem unsure. Retail “was here yesterday and will be here tomorrow, no matter who is president and what’s going on politically,” said Litsky.
“It’s a play for safety. We’re going to eat. We’re going to get pharmaceuticals. We’re going to shop. Retail will always have security,” concluded Litsky.
