Online Shopping Drives Changes in Real Estate Values in First Half

Values for U.S. retail properties generally fell even as they rose for industrial properties in the first half of 2017, according to a new survey, as the growth of online shopping reshapes commercial real estate markets.

The survey, by real-estate services firm CBRE Group Inc., analyzed values partly by looking at the yields investors get when buying income-producing properties, known as capitalization rates. Capitalization rates fall when values rise, and vice versa.

Average industrial capitalization rates fell in the first half to 6.66%, compared with 6.73% in the second half of 2016, according to the CBRE Cap Rate Survey. Rates were as high as 9.91% in the first half of 2009, when CBRE began tracking them, the firm said.

Investors remain bullish on the sector partly because they expect demand from e-commerce companies as well as traditional industrial space tenants to keep pushing rents higher, said Jack Fraker, a CBRE managing director.

Vacancy rates are especially low at industrial buildings close to population centers, because supply is limited in these areas by the shortage of available sites, Mr. Fraker said. “Every one of the top 50 markets in the U.S. has record low vacancy,” he said.

By contrast, capitalization rates for retail power centers—outdoor shopping hubs dominated by two or three big box retailers surrounded by shared parking—rose in the first half of 2017 to 7.31% from 6.92% in the second half of 2016. Capitalization rates for neighborhood shopping centers increased to 7.23% from 7.12% during the same time frame, CBRE said.

So-called high street retail in downtown also is weakening, with capitalization rates rising to 4.52% from 4.37%, according to the survey.

San Francisco was the lone market to see capitalization rates fall, to 3.75% from 4.25%, CBRE said. Manhattan rates rose the most—by 1 percentage point—because of a decline in rents.

Meanwhile, the survey found slight increases in capitalization rates in the hotel and office sectors. “Multifamily asset pricing held firm” in the first half at historically low levels, “indicating strong investor interest and willingness to pay high prices,” the survey said.

Mr. Fraker said the industrial sector is stronger than the others thanks in part to the popularity of the property type among a wide range of domestic and foreign investors. He said CBRE analyzed the participants in deal activity in recent years and found 477 different sellers and 501 different buyers.

“You’re not just seeing the same group over and over again,” he said.

Source: Wall Street Journal, August 22, 2017 4:30pm EST

Author: Peter Grant

Image Credit: Spencer Platt/Getty Images

Read More: https://www.wsj.com/articles/online-shopping-drives-changes-in-real-estate-values-in-first-half-1503433811