If someone tells you with certainty what your retail property is worth in today’s market, you can be confident that they are either naive or not giving you the full picture.
Following the 2021-2022 era of record velocity and low cap rates the market is at a crossroads. On one hand, there is not enough transaction volume taking place in any specific product type or geography to provide clear pricing metrics. On the other hand, there are many factors impacting investor psychology including global and domestic politics especially with it being an election year, fluctuations in long term interest rates, anticipation of future interest rate cuts and new information regarding the U.S. economy.
As a result of this challenging market, I took a deep dive into the first quarter 2024 data for Southern California’s Inland Empire and here are some observations that I want to share in an effort to help you navigate this market.
1. First Quarter 2024 Sales Volume Down Significantly: There was $191M of retail properties that traded in the Inland Empire in the first quarter of 2024. You have to go back to the 2nd quarter of 2020 (just after the world shut down) to find lower volume ($150M). First quarter volume was off 58% from the $462M average of the past 12 quarters. These figures include all retail properties including all price points, all investment property, and vacant owner/user properties.
2. Single Tenant Market Was Worse: The single tenant market saw its worst quarter in at least the past 5 years and was off 56% compared to its 5-year volume average. This is mostly a result of less product since developers have pulled back on development and higher short term interest rates making it easier for investors to sit on cash.
3. Only Six Multi-Tenant Sales in 1st Quarter: This reduced transaction activity continued the trend we saw in 2023 when an average of only 8 properties traded per quarter. This compares to an average of 17 multi-tenant property sales for the 2019 to 2022 period. This reduction in activity is primarily attributed to most product on the market being unrealistically priced, fewer 1031 buyers, and higher loan rates and stricter lending standards.
4. Multi-Tenant Cap Rates Are Uncertain: There are thousands of multi-tenant properties throughout the market and yet less than 40 have traded in the past 15 months. The quarterly average cap rates over the past 5 quarters have ranged from 5.5% to 6.6% and they have NOT gone in a straight line. Due to all the variables involved in each property, it is very challenging to come up with a proper asking cap rate.
5. For Properties Priced Between $1M to $20M, 1st Quarter Sales Volume Down 65%: Compared to the 5 year quarterly average the private sector market which is considered property sales between $1M to $20M was off by 65%. These are the combination of single tenant and multi-tenant retail properties that were not owner/user transactions. It is worth noting that the private market in the Inland Empire is over 95% of all transaction activity.
6. No Dominance in Single Tenant Market: In the 12 months ending March 31, 2024, there were 49 single tenant sales spread across 30 different brands plus 7 independent tenants. Most brands had only one sale. The brands with multiple sales included Starbucks (3), Bank of America (3), 99 Cent Only (3 & Ouch!), 7-Eleven (3), Dutch Bros. (3), Dollar General (2), and Dollar Tree (2).
7. Single Tenant Cap Rates Are Back to Pre-Pandemic Levels: The average single tenant property sold for a 5.8% cap in the 1st quarter of 2024 which ironically was the same as the 1st quarter of 2019. The 4th quarter of 2022 saw the lowest average cap rate at 4.7%.
8. Investors are Buying All Cash: Although we do not have actual data, anecdotally, we are seeing mostly cash transactions and those that do have debt, the loan to value is modest and is usually utilized to accommodate 1031 exchange requirements and not the desire to have leverage.
Conclusion
I believe this is clearly a time when Progressive Real Estate Partners’ being product and geographically focused on the Inland Empire retail real estate market is a major advantage and serves our clients best.
Based upon our current listings and recently completed sale transactions, it has become clear that each property can be sold at a certain price. The key question is whether the seller wants to meet the market.
As mentioned above the 2021- 2022 era of low cap rates and record velocity is history and we have returned to a market that much more mirrors the era of 2015 to 2019 although with lower vacancy rates and higher rent growth. For anyone with a long-term view of ownership, this can be a great time to own retail properties in the Inland Empire.