Will the Holiday Season Be Bullish for Retail? Not If You Look at CAP Rates

I just read a post on the CRE blog Net Lease Nation talking about the upcoming holiday season. Apparently, Fitch Ratings is bullish on the retail sector:

Many companies across Fitch’s U.S. retail coverage have been managing inventory positions well. Gross margins have rebounded for those companies in the discretionary categories that were hit particularly hard during the 2008 holiday period. This, combined with strong cash flow management and the resolutions of liquidity issues for several companies, has resulted in an improved overall credit outlook.

Interesting, but what really piqued my attention was the blog author’s statement that CAP rates may be going down as a result of the reinvigorated retail sector. From the post (emphasis mine):

Though this may not be the holiday season of our dreams, it will certainly be a reality we are more equipped to cope with. Through tempering sales predictions, cutting overhead costs and altering promotional activities, retailers are becoming leaner and more efficient. Furthermore, in this current market where nearly 50% of net leases are traded as retail, should credit scores and sales improve, the only thing that may be going down are cap rates.

I’m just going to go out on a limb here and make a prediction: Not only are CAP rates not going down anytime soon, they are almost certain to continue to steadily rise. CAP rates may stay relatively low for very, very strong single tenant deals leased to the top tier retailers (McDonald’s (MCD), Walgreens (WAG), etc.) but I don’t think we will see real estate investors accepting the ridiculously low returns of the recent boom for a long, long time.

Joe Saluzzi of Themis Trading said it best yesterday while being interviewed on Bloomberg TV: “Hope is not a strategy”

Amen brother.

Comments

[notsosmart:]

many shops will close early on in '10. the 1st quarter will see a shakeout.the phony unemployment #s will be the reality that sinks retail.those who fell for the cash for clunkers will have little or nothing to spend.i hope im wrong.

Oct 02 11:24 AM

[Rhino Realty:]

We should see a Walgreen or two hit 9% by Christmas....Hohoho

Oct 03 08:41 AM