John Zikos: Where Are We in the Retail Real Estate Cycle?

Jun 25, 2015

As published in D Real Estate Daily

Real estate is a cyclical business, and retail is no exception. With the perfect crystal ball, fortunes can be made, and without one, they can be lost—or least missed out on.

I was given the opportunity to invest in a North Texas retail development in 2006, by a client who was purchasing a center that our firm was leasing. Having been around a while and understanding cycles and the critical nature of timing, I was worried that we had to be nearing the end of this current cycle, so I wisely (or so I thought) passed on the opportunity.

In just over a year, an anchor was lost and replaced, a second anchor was secured, the shop vacancy was all leased, and the center, which had been financed with 95 percent leverage, was sold. The investors received a cash on cash return of  1127 percent. Ouch! I was not nearly as wise as I thought.

So where are we now in the cycle? As early as March 2014, I had my first large owner tell me we were nearing the end of the cycle and it was time to sell. While many owners have opted to take advantage of historically low cap rates and sell properties over the last few years, I do not feel that the market believes we are anywhere near the end at this time.

The development pipeline is just now beginning to be filled, and we will see more deliveries of retail projects in 2017 and 2018 than we have seen in the last six years. The overall economy is just now returning to “normal,” and job growth is continuing to trend upward. Americans’ personal credit is just now beginning to be healthy again across the broad spectrum.

So looking into my crystal ball, I think we are in the bottom of the 5th inning. We have a few good years to swing (and hopefully not miss) before the fat lady sings. That being said, while I look back with regret on missing out on the 2006 opportunity, I am thankful that I wasn’t swinging at bad pitches in late 2008!