By Scott Lynn
What was the “MOOD” in Vegas this year? That is the #1 Question that colleagues and friends ask following the annual trek to the RECON/ICSC Conference.
If attendance is any gauge of the so-called “mood”, those numbers up…over 35,000 commercial real estate folks from across the globe. And, the attendance numbers have been steadily increasing over the past four years, mirroring the recovery in the economy. Whatever the official attendance numbers are for this show, add at least another 10% or more for those who never make it to the convention floor preferring instead to hold court in the many lobby bars or working the endless party circuit. The hotels were packed, cab lines were long, forget about it if you didn’t make a dinner reservation, and people were spending money. I guess you could say that the mood was very good.
The positive mood transcended to the convention floor…at least it did in our booth, which we shared with two Texas-based, retail-focused brokerages along with an owner/property management firm. Most of the time it was standing room only. Everyone reported increased leasing activity especially from grocery concepts and restaurant chains.
Site plans are changing.
Gone are the multitude of giant “Power Centers”. Tenants seem to be gravitating to the “urban” redevelopment projects being built next door to or in conjunction with multifamily and office. Tenants, Users and Developers are adapting quickly to the “Live, Work, Play” development. Mixed Use is no longer a “push back” but rather is “preferred” by any measure based on the property/project offerings at the show. That is a big contrast from the development cycle of ten years ago when many new development deals were driven by a Target or Kohl’s, both of whom , for the time being, have substantially reduced the velocity of new store openings.
Lifestyle, Specialty, Entertainment and Food Service-oriented retail development projects (or redevelopment deals) seemed to dominate most of the visible display boards in the booths we visited. In our booth there were nonstop visits from national restaurant chains as well as new grocery concepts hungry to get a foothold in the Texas market or to pick off those prime sites in hot development markets.
Notwithstanding the positive mood along with a healthy velocity of tenant activity, the economic metrics of retail property markets remain strong with respect to occupancies, absorption and rental rates. Even with the spattering of new development activity, most of this new space is heavily pre-leased. Property owners, investors and capital providers have all jumped on the commercial retail band wagon eager to buy and finance. Cap rates have been pushed downward while retail property values are on the upswing.
Property owners are in a quandary determining if now is the time to sell given the uncertain interest rate environment, and, worse yet, the lack of viable product to buy at good prices forces them to pause and think about what they would do with the money if they did sell. The lack of quality assets to buy continues to keep prices moving upward. Pulling the sell trigger can be a tricky decision.
The conference was heavily populated with a smorgasbord of capital providers, including single tenant net lease financiers, CMBS, Life’s, banks, and entrepreneurial and institutional equity investors. With stable/increasing prices and an abundance of cheap debt, providers in all strata of the capital stack are showing a willingness to push leverage, especially for existing properties with stable rent rolls or new development (and redevelopment) supported by pre-leasing.
We ran into a few capital sources willing to go to 100% of cost on some national non-rated tenants. There were several banks and construction lenders that were eager to look at new development, but there has to be good story, the sponsor needs to be quality and prepared to put your tenants under a microscope in terms of credit underwriting.
On a final note, we heard a lot of chatter about increasing construction costs are catching everyone by surprise. Some deals have to be repriced at higher rental rates or skinned down to nominal profit to get the numbers to work. Escalating costs will surely keep a lid on new development or spec construction.
All in all, 2015 RECON/ICSC was the most robust gathering since prior to the 07/08 downturn. But, don’t worry, it was far from bubbling out there.
The author, Scott Lynn, is the founding Principal of Metropolitan Capital Advisors. Scott can be reached at email@example.com or 972-267-0600.