Retail investment activity is ticking up, slowly. In the first half of the year, investment activity increased 3% nationally, over 2017, and the second quarter alone increased 41% year-over-year, according to research from Newmark Knight Frank. The Western US has lead the increase in activity, increasing 33% year-over-year and 96% for the second quarter alone. Despite the headlines, investment activity has grown steadily since early 2015.
“With the country coming off of ten straight quarters of decline, investor uncertainty due to a combination of interest rate speculation and volatility, continued retailer consolidation, bankruptcies and general uncertainty coupled with a lack of refreshed pricing data points seems to have calmed,” Glenn R. Rudy, senior managing director of retail investments at NKF Capital Markets, tells GlobeSt.com. “With the increased volume the surge in data points is leading to realistic pricing discovery and abundant capital is ready to continue this positive trajectory.”
In addition to popularity of West Coast markets, secondary markets are also seeing an increase in activity, and are actually trending above primary markets in terms of sales volumes. “Secondary markets, which historically have always trailed primary markets in terms of overall activity, outpaced primary markets through the first half of 2018 by a significant margin,” says Rudy. “This is primarily due to the sheer lack of available product in primary markets and its correlated pricing. However, now that there are some additional data points supporting today's pricing in these secondary markets, the yields have simply been too attractive for capital, starved for allocation, to resist.”
While it is surprising to hear that retail investment is increasing, it isn't surprising to hear the grocery-anchored retail has been the favored asset class. Grocery anchored retail is highly Internet resistant, and it is popular across investor classes. “The sheer scarcity of core, grocery-anchored product has kept pricing at historic levels and even improved in some cases,” explains Rudy. “Grocery-anchored retail investments represent the flight-to-safety alternative in a transformative industry. The fundamental idea that a larger segment of the consumer base will continue to patronize the brick and mortar grocery store versus buying online drives performance of these centers thus providing the most reliable and predictable revenue across asset types.”
Despite growing retail investment sales, the narrative around retail is generally negative. Rudy, however, says that every product has challenges, and investment strategy is designed to mitigate that risk. “Clearly, there are challenges across all product type. Some may say none more than in retail,” he explains. “To that we say: bring it on. Challenges breed opportunities. The transformation the retail industry has taken has brought about one of the most exciting eras in the history of retail. We are fortunate to have as clients many at the forefront of this current retail innovation. These dynamic developers and operators are proactively embracing an omnichannel strategy with their tenants. That strategy is an integral part of the new experiential retail that breeds success. Their proactive and thoughtful approach will be rewarded long-term as human beings are social in nature with an inherent need to interact. Let's not forget that brick and mortar sales still account for over 90% of all retail sales in the country.”
Looking ahead, Rudy expects more growth. “We believe the second half of the year will be robust as remaining uncertainty that hovered in the first half continues to subside,” he says. “Age old participants in our industry sit with full allocations waiting to be deployed. Re-engaged or completely new capital sources for retail investment are abundant. So long as the debt markets remain relatively stable, we see no reason why there will not be a significant uptick extending the positive performance of the first half.”
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Kelsi Maree Borland
