Lack of Transactions Makes True Cap Rates Hard To Pin Down
Retail Traffic reports: One of the big challenges facing the retail real estate sector is that with so few investment sales getting done there is little confidence that the prices paid on the few deals currently getting closed reflect true property values or cap rates.
In testimony before Congress' Joint Economic Committee on July 9, Jeffrey Deboer, president and CEO of the Real Estate Roundtable, said, "With a scarcity of property transactions, there is no effective price discovery, and this further exacerbates the real estate market crash."
According to the most recent data from Real Capital Analytics (RCA), a New York City-based research firm, cap rates on closed sales of retail properties averaged approximately 7.75 percent in May, a comparatively slight increase from the 7.5 percent reported in January. (At the peak of the market, in 2007, cap rates were in the 6 percent range). But RCA researchers note that the limited market data in the absence of new transactions make it hard to come up with a true benchmark for retail caps. The average cap rate for May is based on total retail sales volume of just $418 million, down 89 percent from May 2007, according to RCA. Further, most of the sales getting done are on stabilized properties—the only kinds of deals that can get financed in the current environment. If more distressed sales were occurring, market participants think average cap rates would be quite a bit higher.
This month, Moody's/Real Commercial Property Price Indices reported a drop of 19.4 percent for retail assets compared to the same period in 2007, to 150.09. The retail index was also off 12.9 percent compared to one quarter ago. Moody's estimates that for all commercial property types, the Aggregate Price Index has declined 34.8 percent compared to its peak in October 2007.
As a result of financing difficulties and the perception that retail assets will continue to lose value for the foreseeable future, buyers of retail centers remain few and far between. Most REITs and insurance companies have stopped acquisition activity altogether, says Bernard Haddigan, managing director of the national retail group with Marcus & Millichap Real Estate Services.
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Posted by: Matthew Stone