RCA in the commercial property press:

RETAIL REAL ESTATE INVESTORS REMAIN PARKED ON THE SIDELINES

Retail Traffic reports: Buyers are sitting on vast mountains of cash, but are content to wait for bargains to emerge.

With investment sales volumes nearly at a halt, investors have continued to hoard capital as they wait for prices to fall further. Yet in the current climate, where those with access to capital remain in the driver's seat, questions linger as to how much liquidity exists and what properties are actually worth. As a result, there remains great uncertainty as to when money will start to move back into the retail real estate market.

However, this cash is being amassed at a time when the broader commercial real estate market is recording its lowest level of sales activity since the early 1990s. Sales of retail properties have slowed to a trickle, with 128 properties valued at $1.8 billion trading hands during the first quarter of 2009. That volume is less than one-quarter of the 592 properties valued at $7.1 billion that sold during the same period in 2008, according to New York-based Real Capital Analytics. In 2007, the first quarter volume amounted to 991 properties for $18.8 billion. The research firm tracks real estate sales valued above $5 million.

The lack of deal flow can be blamed on several factors–the continuing gap between bid and ask prices, uncertainties in the market, and the ongoing crisis in financial markets. All of those hurdles are contributing to investors' decisions to keep capital on the sidelines. The biggest stumbling block for many is the perception that prices remain high. Cap rates on completed retail deals were 7.32 percent during the first quarter, according to Real Capital Analytics. That's less than 100 basis points above the low of 6.56 percent recorded in the second quarter of 2007. However, most observers in the market think that retail property values are down at least 25 percent from peaks and may fall 40 percent before all is said and done.

As a result, the gap between bid and ask prices remains sizable. In some cases, the difference between the bid and ask spread is as high as 20 percent to 40 percent, says Dan Fasulo, managing director at Real Capital Analytics. "In that type of environment where sellers and buyers can't agree on pricing, it's pretty easy to see why sales activity would come to a screeching halt," he says.

So how do you resolve this disconnect between the data, bid/ask gap and broader perception that values need to fall further? For one, Real Capital's figures only cover completed deals and for the most part the properties changing hands are higher quality. So that's skewing the figures some. The cap rate on offered deals (as opposed to closed), for example, was 7.68 percent. In the past, Real Capital had recorded offered cap rates lower than closed cap rates. Some brokers think that if more lower quality and distressed assets were trading today, cap rates would be at least 200 basis points above the 2007 low. As a result, some properties will eventually trade for cap rates higher than 9 percent or 10 percent.