How have delinquencies
impacted the retail real estate sector?
While investor demand remains
greatest for stabilized retail properties occupied by strong tenants with good
credit, the market for distressed deals has become more active. More lenders
have begun to list distressed shopping center properties in the Atlanta metro
area, a trend likely to persist over the remainder of this year. So far, even
vacant retail assets have attracted interest from local buyers, although prices
must be approximately $40 per square foot for deals to occur. Distressed sales
will likely continue to appeal mostly to local private investors, as the
majority of the retail properties classified as REO as of the third quarter are
relatively small, with an average size of approximately 33,000 square feet.
How is the office market
performing and how much duress is that sector under?
Office property operations
have continued to soften this year due to the completion of substantially
vacant properties in the urban core and continuing business closures and tenant
downsizings. Properties scheduled for delivery this year broke ground during
better economic times but will expand office stock by a significant 1.9 percent
at a time when demand remains slack and vacancy already exceeds 20 percent.
While gradual strengthening in the local economy will lead to the creation of
approximately 7,700 office-using jobs by year-end, many of these positions will
fill underutilized space before tenants contemplate enlarging their footprints.
Efforts by property owners to
fill vacancies as demand improves and leases roll over will sustain the
downward trend for rents, placing additional pressure on NOIs and contributing
to more distress in the local market. Although fundamentals will remain weak
for several more quarters, prices have likely neared the bottom. As a result,
investors seeking discounted value-add opportunities ahead of a robust recovery
likely will step up activity in the months ahead. REO activity is also on the
rise, and banks will dispose of more reclaimed assets as their balance sheets
improve. These lender-owned assets, which may be priced at deep discounts, will
present opportunities for aggressive investors to enhance value through the
employment of re-tenanting strategies, including steep rent cuts.
John M. Leonard is a first
vice president and regional manager of the Atlanta office of Marcus & Millichap Real Estate
Investment Services. Contact him at [email protected]
or (678) 808-2700.
