Yield-Seeking Investors Consider Wider Range Of Assets and Markets in 2016
Strengthening property performance, steady equity flows and competitive debt markets combined to generate a modest increase in transaction velocity last year and provide a stiff tailwind riding into 2016. Sales of single-tenant assets accounted for more than half of all transactions for the eighth consecutive year in 2015, but the proportion of multi-tenant deals rose, indicating greater acceptance of operational and re-leasing risk among investors. The average cap rate in all deals contracted about 20 basis points to roughly 6.5 percent as competition for assets intensified. Initial yields dipped to less than 6 percent in markets where lower returns are customary, including the more-vibrant California markets and supply-constrained Miami-Dade. With long-term interest rates projected to remain low in 2016, additional positive leverage opportunities will emerge for multi-tenant property investors. Private capital, specifically, was active in 2015 and will continue to target opportunities to enhance value, employing strategies that include turning over tenants and refreshing property appearance.
Heightened investor confidence, along with limited construction that will support strategies to raise rents to augment NOIs, will sustain a liquid investment market in 2016. Many investors seeking assured returns or trading out of management-intensive properties will continue to focus on single-tenant properties net leased to highly rated tenants, especially in the event that turmoil in global markets persists. Institutions will also maintain a conservative stance, targeting returns in the 6 percent range offered by anchored shopping centers with long-term leases in place in major metros. In addition, retail assets will continue to attract the attention of redevelopment-oriented groups. Obsolete or underperforming regional malls that can be reconfigured as mixed-use concepts, for example, could find buyers among this contingent. In general, retail investors will continue to take in the changing retail landscape, wherein many retailers continue to pursue multi-channel strategies combining actual stores and an online presence. In addition, millennials continue to come of age and form households, often in urban settings that will require new retail concepts.