Retail deals push commercial transactions to record level

Faith in the spending habits of the American consumer helped drive investors toward retail properties in the closing months of 2002, resulting in a record dollar volume and the highest total reported since the third quarter of 1998, according to the CCIM/Landauer Investment Trends Quarterly.

Even with four quarters marked by economic sluggishness and political turbulence here and abroad, retail properties captured 22 percent of all commercial property sales in the fourth quarter, a 7 percent increase over the previous quarter.

Capitalization rates for retail properties averaged 8.97 percent, continuing a trend of stores commanding a price premium compared to other real estate assets. One factor behind this trend is retail sales-per-square-foot have been diluted by a large inventory of store space across the country. This competitive risk required a cap rate premium, even with relatively robust consumer spending. Nationally, cap rates averaged 9.3 percent for all properties, a slight increase over the previous quarter.

An analysis of buyers and sellers within the sector reveals that real estate investment trusts purchased 46 percent of retail properties, mostly in the upper bracket of the market. For example, two retail center deals completed by REITs each exceeded $400 million. Foreign sources were the largest sellers of retail product, accounting for approximately 30 percent of the deals.

"With the consumer doing a lot of the work in keeping the economy afloat in the early 2000s, it is natural to find investors seeking to link their real estate allocations to the broad-based spending power centered in retail properties," said CCIM Institute President Barry Spizer. "Fourth-quarter results mark the return of some large traditional centers, and with them the return of the million-square-foot sale."

During a calendar year marked by a stubborn economic slump, job growth stagnation, the continued threat of terrorism and the prospect of war, the commercial real estate market displayed overall resiliency and strength in the closing months of 2002.

The Investment Trends Quarterly, which debuted in 1995, reported a 12.3 percent increase in dollar volume compared to 2001 and an 8.1 percent increase in the transaction count.

The average price per deal in fourth quarter rose to $22.3 million, continuing a near 2 1/2-year trend where the mean deal price tallied above $20 million; the only exception was the final quarter of 2001, the months that followed the Sept. 11 attacks.

"Understandably, some observers are concerned that this investment behavior may prove the real estate version of the irrational exuberance' that led to the 1990s stock market bubble and subsequent deflation in corporate asset prices," said Hugh F. Kelly, author of the ITQ report. "Labor figures, however, look very much on schedule for recovery at this point, if past business cycles are a reliable guide."

Other key findings reported in the fourth-quarter 2002 issue of the Investment Trends Quarterly are:

Large-scale office investors concentrated in just a few areas of the country in the fourth quarter. Metro New York clearly led all markets with 21 percent of the total investment volume, and Chicago tallied 14 percent to take second place. The balance of office investment centered in the major markets on either coast.

Investment in the Pacific region (Alaska, California, Hawaii, Oregon and Washington) rebounded in fourth quarter to 28 percent from 23.9 percent in the previous quarter. This region led all others in 2002 in total dollars invested.

Economic uncertainty kept the hotel market in the doldrums. The sector captured just 2.6 percent of the sales volume, below the land category at 3.9 percent.

The CCIM/Landauer Investment Trends Quarterly represents a broad-based sampling of fourth-quarter 2002 transactions with a total value of $13.79 billion, the majority of which have been reported by Certified Commercial Investment Members.