February 16, 2022

Retail Investment Volume Is Exploding

Excerpt of article originally published by GlobeSt

Retail investors are racing back into the sector. As a result, retail investment volume has never been stronger, proving that reports of retail’s demise were overblown, according to Colliers’ Q4 Capital Markets Snapshot.

Total volume topped $30 billion for the second time ever. Sales volume has shown consistent improvement throughout 2021, with Q4 exploding.

And unlike Q3 2018, when investors traded $31.9 billion, there was no single massive portfolio to drive volume. Instead, it is a more broad-based uptick in overall activity. Part of that is due to improving cash flows.

Fundamentals, too, have held up well, with absorption positive for several quarters in a row and store openings outpacing closings in 2021 for the first time in several years.

Retail Volume ‘Caught Up’ to Pre-Pandemic Levels

Senior Managing Director Chris Angelone, National Retail Group Leader and Boston Office Co-Head, JLL Capital Markets, tells GlobeSt.com that transaction volume for retail has effectively caught up to pre-pandemic levels.

“Quality retail transactions of scale on both a one-off and portfolio basis are highly sought after in the market today,” Angelone said. “Grocery-anchored retail and best-in-class, non-grocery-anchored retail in primary markets, growth markets, and high-quality demographic pockets are trading at all-time low cap rates.”

M&A activity was particularly strong in 2021 with three major entity-level transactions valued at $14.3B, marking the second most active year for entity-level transactions in the past 10 years, according to JLL. Over half of the M&A volume can be attributed to the merger between Realty Income Corp. and VEREIT, the retail assets of which were valued at approximately $7.2B.

All retail property types, excluding urban, saw significant cap rate compression when compared to Q4 2019 with average yields for Neighborhood & Community Center declining 100 bps; Strip Centers – 90 bps; Power Centers – 60 bps, and Grocery-Anchored – 50bps. Private capital expanded their share of the retail market in 2021, constituting 75% of acquisitions and 71% dispositions.

Retail: The Bond Market of Real Estate

Asher Wenig, Northmarq Senior Vice President, tells GlobeSt.com that the single-tenant net lease retail sector had its best quarter by far in Q4 2021, outpacing the previous high-water mark by more than 40 percent.

“And even though the multi-tenant retail sector didn’t set any records, we’re seeing demand rebound substantially from the height of the pandemic,” Wenig said.”

Combined, the total retail market posted $31.2 billion in investment sales volume during Q4 2021, and more than $75.1 billion for the year, Wenig said.

“Net lease retail investments with strong tenants and long lease terms never went out of style,” he said. “It’s the bond market of real estate and a great hedge against volatility. Shopping centers are making a great comeback too. We’re seeing demand from institutional and private investors, as retailers continue to announce expansion plans and consumers return to stores.”

No Shortage of Capital

Going forward, the retail real estate industry should have no shortage of capital as it continues the recovery that began in 2021, Gary Glick, Partner at Cox, Castle & Nicholson, tells GlobeSt.com, despite some continued headwinds in 2022, mostly from supply-chain issues, inflation, and the continuation of the impacts of COVID-19.

Investment activity in retail projects substantially increased in 2021 due to plentiful capital flows and strong demand from investors. With equity capital targeting US real estate near all-time highs and low-cost financing readily available, capital likely will continue to support investor demand for retail projects in 2022.

“Foreign capital is also likely to increase for the acquisition of retail assets in 2022, as long as restrictions on international travel eventually ease,” Glick says.

“Although investors still favor industrial and multifamily projects, neighborhood shopping centers and well-located and well-conceived regional malls and lifestyle centers will continue to be attractive assets to investors, especially as cap rates for industrial and multifamily projects continue to be significantly lower as compared to retail projects."