Shopping Centers Today International

FEB 2016

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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10 S C T / F E B R U A R Y 2 0 1 6 Embracing the interest-rake hike U.S. real estate profes- sionals, who toil on the retail side of commercial markets, are greeting the recent interest rate rise with cautious optimism: there will be some nega- tive effects on the pace of transactions but in the wider scheme of things it all might be just a very big holiday gift. Late last year the Federal Reserve raised short-term interest rates for the first time since 2006. The move up was by a quarter of a point to the 0.25-0.5 per- cent range. Will this affect retail real estate markets? That depends, says Kyle Mat- thews, chairman and CEO of Matthews Retail Advisors in El Segundo, Calif. "It all gets back to cost of capital. If the debt a buyer obtains to purchase a property becomes more expensive through higher interest rates, then the buyer just cannot pay as much for a property." Typically in retail, the rental amounts are more or less fixed for extended peri- ods of time, so, because the rent will not be increasing commensurate with the in- crease in cost of borrowing, then to compensate an in- vestor will not pay as much for the property, Matthew explains. Any effect from an interest rate rise, which will mean a correspond- ing rise in capitalization rates (cap rates), will first be seen in the second- ary and tertiary markets, observes Bryan Ley, an HFF managing director in its Los Angeles office. For trophy and Class-A properties, those deals are mostly unleveraged, bought by institutional in- vestors, and are not as im- pacted by the cost of debt, says Ley. "However, for those deals in secondary or tertiary markets, which rely on conduit financing (commercial mortgage- backed securities debt), the spreads have widened. It has caused a bit of un- easiness because private and regional buyers who acquire that stuff rely on financing, which is a little more expensive today." As a balance, sellers have to be a little less aggressive in their pricing, Ley adds. "For a long time every deal that was getting done was at a new high. Now there is a little bit of softening in the outlying areas." The rise in interest rates usually means a stronger dollar and the Fed is hop- ing for a bit more inflation in the national economy, both of which should be beneficial to retailers, if not the investors in retail real estate. "Even if cap rates go up as a result of increasing interest rates, at the end of the day, we should see an increase in NOI (net operating income)," said Jimmy Board, a manag- ing director within Jones Lang LaSalle in Houston. "Values are based on NOI and cap rates, so if your NOI has gone up and so has your cap rates, your values are going to remain relatively flat." He added that "cap rates will move in correlation with interest rates. People will say that means values will go down, but if inter- est rates go up there is con- fidence in the economy, which means we will move into an inflationary period. That will result in more consumer spending, which is good for retailers. Improved store sales trans- late into higher rents and better NOI." Drone shopping Drone maker DJI opened its frst physical store, in Shenzen, China. The 8,500-square-foot store dis- plays the company's drones and shows videos of the drones in action. Customers are not allowed to operate the drones in the store. '' Even if cap rates go up as a result of increasing interest rates, at the end of the day we should see an increase in NOI. '' — Jimmy Board JLL T H E C O M M O N A R E A

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