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SHOW NOTES FOR EPISODE 636: A REBOUND IN RETAIL REAL ESTATE?
When Covid hit, the real estate market restaurants got crushed and offices and retail got hit even harder. But, in a recent survey by Crexi, signs of a turn-around are emerging. In today’s podcast, Bill takes a deep dive into the numbers to see if growth is on the horizon.
When Covid hit, the real estate market did all kinds of interesting things. Single family homes continued to increase in price. Multifamily stayed steady in light of eviction moratoriums and forbearance moves but rebounded pretty quickly. On the commercial side, Industrial real estate took off!
But, on the negative side, restaurants got crushed and offices and retail got hit even harder. But in a recent Crexi trends survey in May new restaurants added to Crexi demanded a noticeably higher average rent per square foot, up 9% compared to April rates. The asset class was the only one – on both the sales and leasing side of Crexi – to show more than a 3% fluctuation in pricing.
Hiked prices coincide with returning demand for restaurants, as people starved for in-person interactions flock to sit-down dining experiences. Restaurants and restaurant spaces are experiencing valuation gains as a result.
And, on the retail side, retail has taken a surprising turn for the better.
Recently, private investors are snapping up shopping centers and other bricks-and-mortar real estate, a bullish sign for the beleaguered retail property sector as it emerges stronger than expected from the Covid-19 pandemic.
While many real-estate investment trusts and other big players remain cautious, retail property sales are increasing to family offices, wealthy individuals and small private investment firms. These buyers, who are more nimble than big companies, were responsible for nearly three-quarters of retail-asset acquisitions in 2021, a 30% increase from the 10-year historical average, according to real-estate services firm JLL (Jones, Lange, LaSalle, Inc.).
If current trends persist, brokers expect REITs and major institutions to follow these smaller investors to the market. According to Danny Finkle, co-head of retail capital markets at JLL, they expect all of the major capital sources to want to have exposure to retail. The renewed investor interest in retail marks a turnaround for a sector that has been struggling to adapt to the rise in e-commerce since before the pandemic.
Retail property transaction volume in the U.S. surged last year to nearly $82 billion, a 24% increase from 2019, according to MSCI Real Assets. The enthusiasm continued in the first quarter of this year, with transaction volume hitting $25 billion by April 30, an 82% increase over the same period in 2021.
Investors are warming to retail partly because of population shifts that favor suburban shopping, as evidenced by the growing popularity of open-air shopping centers. Meanwhile, the retailers that survived the pandemic’s initial lockdowns and surge in online shopping have found many customers still want to shop in person.
The share of e-commerce sales as a percentage of total retail sales has been falling since it jumped at the start of the pandemic. Online sales comprised 14.3% of overall retail sales last quarter, according to JLL still higher than before the pandemic, but down from 16.4% in the second quarter of 2020.
Many retailers are paying their rent on time, looking to expand and, increasingly, competing for limited square footage. New retail development has been slow since 2009 and the lack of supply has started to push up rents, according to JLL.
Retail investor Time Equities has noticed new and stronger competition, particularly from other private investors and even hedge funds, since late 2020, according to Ami Ziff, the firm’s managing director for national retail. The new bidders are particularly active in bids for grocery-anchored shopping centers and properties in more far-flung parts of the country.
According to Ziff, “Things have not only stabilized, but conditions have improved to some of the best fundamentals I’ve seen since 2007, maybe better”
Retail property is appealing to investors also because prices and returns remain attractive, especially compared with the favored commercial property types, like warehouses and rental apartments. While nearly all property types are down since the start of the year, retail REITs have outperformed apartment and industrial stocks, according to data from Bloomberg, Nareit and Green Street.
In Port Charlotte, Fla., a small city on the Gulf Coast about halfway between Sarasota and Fort Myers, a bidding war broke out earlier this year over a 140,000-square-foot shopping center anchored by an Office Depot. The center attracted 19 bidders, mostly private investors, and sold last month for $19 million, or 20% more than it was in contract for two years earlier before the pandemic derailed the sale, according to Jim Michalak, managing partner at Plaza Advisors, the broker who represented the seller, a New York-based private-equity group.
The bidding was strong in part because of low retail supply in the area and also because the shopping center’s 83% occupancy rate and Office Depot’s plans to depart by next year offer new owners the opportunity to add higher-paying tenants. Mr. Michalak said that the buyer is confident that retailer demand is strong enough to fill the space at attractive rents, with two possible tenants already considering the anchor location.
“Private investors have migrated to acquiring shopping centers because of better yields, compared with other real estate,” Mr. Michalak said.
Investing in retail remains a risky business. Rising interest rates are tanking some deals, and overall commercial property sales were down 16% in April, compared with the same month in 2021, after 13 straight months of increases, according to MSCI Real Assets.
But Mr. Finkle and others said they expect retail assets will continue to attract capital.
“I think people are trying to understand if a recession is coming and what will be the extent of inflation,” he said. “But, so long as retail fundamentals continue to perform, investors will continue to invest in retail assets.”
This is an area we will continue to monitor at the Old Dawg’s REI Network and will keep you posted.
Well, that’s it for today!
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