Jon: Most obvious was that attendance was down significantly, but that made way for better conversations. Everyone was quite positive. All the past chatter about the “Retail Apoclypse” has subsided, not once did I hear any negative chatter. The focus was on doing deals and getting business done. It was a very productive show.
Patrick: Generally upbeat. Not surprising the mall and power-center owners are being cautious, but for net lease and the usual suspect retailers within our niche, everyone’s expecting a good year with continued store openings and modest cap rate expansion. For the most part, net lease assets are resistant to the Amazon effect, which is helping drive the demand side. Sales activity for 2017 is predicted to be on par, if not better, for 2018. There is still plenty of supply, although the supply of true “A” assets has tightened up. Big picture on supply vs. demand looks like we’re in a state of equilibrium.
Let’s talk interest rates. What should we expect for the remainder of 2018 and how will that impact cap rates?
Patrick: Predictions have been that interest rates would rise 3-4 times this year, and 3-4 times next year. In actuality, we’re about to see one more hike in June, and expect one more this fall. Next year, depending on inflation and the yield curve, we’re hearing more people forecast only 2 hikes for 2019. This cycle has seen responsible borrowing and lending, and with rates moving and macro issues looking favorable, modest loosening of standards is expected which will help to leave the cost of debt in check. For cap rates, they are relatively flat, and the market will likely see a 15-25 bps increase through the end of the year.
With interest rates ticking up, how are investors responding?
Jon: Look, interest rates aren’t making any significant moves and are modestly rising. It’s more about the what’s available and there seems to be a more polarized set of buyers. There are those seeking more of the core assets, where location and demographics are the driving forces, shifting away from the tertiary markets. On the other extreme, we’re seeing those chasing yield, where buyers are taking more chances on the creditworthiness of the tenant.