Balancing Act - Supply & Demand in Commercial Real Estate

We are seeing continuing negative absorption in the retail market. Simply put - little demand for more and more supply. National tenants are few and far between and local tenants are considering downsizing and relocating to better real estate where they can drive better terms than they could before. Until this trend changes retail properties without co-tenancy or location will suffer.

While this trend is happening locally another interesting trend is happening nationally. The recession put the brakes on national retail expansion. Strong retailers cut store openings and weak ones stopped expanding altogether. At the same time competing returns on “safe” assets haven’t moved off low single digit returns making more investors interested in high quality real estate where they can experience a 6% - 8% return plus have some of that income sheltered by depreciation. Bottom line is that in quality assets there currently is a supply-demand imbalance favoring the seller.

Even in smaller markets like Wenatchee we recently sold such a quality asset at a cap rate that we never thought possible. It was priced higher (in relation to its income) than anything else in the market and marketed nationally. Because of this supply and demand imbalance we received 8 full price offers, from predominantly out of state buyers, within 10 days. We chose what we thought was our best buyer and the deal closed in 48 days at full price and at likely the lowest cap rate of any transaction in the Wenatchee market.

Unfortunately, these types of assets don’t come by very often and I can’t think of another one available unless the owner of the new Walgreens under construction in East Wenatchee decides he’s a seller - and if he does I expect it will demand a high price.