Latest Commercial Real Estate Market News & Investment Advice in Los Angeles

Strong Jobs Creation Numbers but Weaker Spending? Cap Rates Jump, Reversing Long-Term Trend

December, 2016
by Karl Niehaus, President, CREI

Commercial Overview:

CAP RATES JUMP, REVERSING LONG-TERM TREND: Cap rates for single tenant CVS, Rite Aid and Walgreens properties all increased significantly in the 3rd quarter of 2016. Investors seem most concerned by US antitrust regulators' requirement that Walgreens sell between 500 and 1,000 stores before they will approve its plan to acquire Rite Aid. The potential merger of the 2 retail giants has also slowed transaction volume in drug store sector as investors wait to see how it plays out. But drug store assets in core markets with strong sales performance remain attractive. Still, concern about the merger has caused the cap rate premiums associated with the drug store sector to decrease. In the 3rd quarter of 2016, the spread between the overall net lease retail market and the drug store sector compressed to 14 bps. This spread has historically been greater and in the past three years the spread ranged from 62 to 100 bps.

Economic Overview:

STRONG JOBS CREATION NUMBERS BUT WEAKER SPENDING? Private companies added a net 216,000 positions during the month, smashing the 165,000 estimate from economists surveyed by Reuters and marking the best month since June. The number was nearly double the 119,000 in October, which was revised lower from the originally reported 147,000. That's the good news, the challenge for property owners is that spending is down. U.S. consumer spending increased less than expected in October as households took advantage of rising incomes to boost savings to a seven-month high, but remained sufficiently strong to support economic growth in the fourth quarter. For tenants to be doing well and locations to be opening, spending is a must. Hopefully year-end sales will turn out strong.

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