The changing buyer profile of retail properties

Zach Wright
Net lease investment sales, Pinnacle Real Estate Advisors

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The parties at the closing table for retail properties in Colorado are drastically different today compared to the past. As Colorado’s economy continues to accelerate and its population continues to grow, investors nationwide have sought to join the excitement and are acquiring retail properties in the state at an unprecedented pace.

Thus far in 2018 (as of Oct. 1), out-of-state investors have accounted for 51 percent of all single-tenant retail transactions and 44 percent of all multitenant retail transactions. This is a dramatic increase compared to 10 years ago. For example, in 2008, out-of-state investors purchased 35 percent of all single-tenant retail properties and 24 percent of all multitenant retail properties, a 16 percent and 20 percent difference, respectively.

Certainly the real estate investment environment was drastically different in 2008 as the Great Recession began to take its effect. However, from 2003 to 2008 out-of-state investors accounted for 39 percent of all single-tenant retail transactions and 30 percent of all multitenant retail transactions.

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Coinciding with the influx of out-of-state capital into Colorado retail properties is a dramatic increase in property values, with properties selling for record low cap rates and record high prices per square foot. The correlation between increased property values and the prominence of the out-of-state investor is quite clear. As the demand for Colorado retail properties continues to grow among out-of-state investors, so have the property values.

The median single-tenant retail cap rate in 2017 was 6.05 percent and current year-to-date is 6.13 percent. This represents a significant drop when compared to the average median cap rate over the past 15 years in the sector that was 7.12 percent. A similar rise in value can be observed by analyzing price per sf sold, which has experienced a major increase over the past 15 years. The median price per sf for a single-tenant retail property in 2017 was $338 and current year to date is $343. This is over 33 percent greater than the average of the past 15 years for median price per square foot, which was $256.

Multitenant retail properties have similarly experienced an increase in value with significant cap rate compression and increased prices per sf. The median cap rate for multitenant retail properties in 2017 was 6.5 percent and current year to date is 6.25 percent. This is substantially less than the 15-year average of median cap rates, which was 7.56 percent. The median price per sf year to date is $186, which is almost 20 percent greater than the 15-year average for the median price per sf of $157.

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Although Colorado retail properties are expensive in relation to the past, coastal investors, particularly from California, are finding higher yields in Colorado compared to their local markets. California-based investors have accounted for almost 20 percent of all single-tenant retail properties sold year to date and 15 percent of all multitenant retail properties sold year to date. California-based buyers will continue to be a driving force given it is the most populous state with almost 40 million residents, is located nearby, and its retail properties are priced at a premium compared to Colorado.

Investors based in California and other states have created a very competitive investing environment in Colorado with properties selling for record prices. Often these transactions come with very attractive terms, such as quick due diligence periods, quick closings and all-cash transactions, making it even more difficult for local investors to compete.

With Colorado becoming increasingly expensive and unfamiliar to long-time local retail investors, many have opted to invest in other nearby states and markets. Many are finding higher yields and less competitive bidding processes in nearby states such as Wyoming, New Mexico and Kansas as well as Midwest markets such as Missouri, Illinois and Iowa.

The trend of out-of-state investment in Colorado retail properties and the premium pricing is here to stay. Historically, residents in states where retail properties have traded for high values and significant premiums to the nation have sought higher yields in other markets – is it time more Colorado-based investors consider such?

Featured in CREJ’s November 2018 Retail Properties Quarterly

Edited by the Colorado Real Estate Journal staff.