Retail Checks Out for Diversifying Investors

CALABASAS,CA–Where is the crisis in retail? Virtually non-existent in most sectors, says Scott M. Holmes, SVP and national director of Marcus & Millichap’s Retail Division, and with good reason.

First, as the firm’s most recent retail report explains:

“The coming year holds the prospect of many positive dynamics for retail investors. Household wealth and disposable income are at record levels, consumer confidence remains elevated and retail sales grew by nearly five percent last year, well ahead of the long-term average…. There will assuredly be headwinds, particularly for retailers and shopping malls that have failed to adapt, but as these icons of days gone by finally surrender their spaces, new opportunities will take their place.”

In fact, those vacancies are providing construction-free opportunities for retailers who are expanding–and yes, they are expanding. “Those vacancies create a release valve for so many stores with big expansion plans,” says Holmes, who ticks off a number of prime examples: “Ross Stores is opening 100 new stores, T.J. Maxx 125 and Dollar General is planning another 900 this year. These are not small shops or one-off plans.”

In fact, the retail report puts multi-tenant availability “well below six percent.” What’s more: “Net store openings should far outnumber closures again in 2019, boosting demand and asking rents. This year, multi-tenant rents will reach $18.19 per square foot.”

“The rental-rate growth is tracking higher than inflation,” says the SVP. “The average national rental-rate growth is 3.6 percent.”

What does all of this mean for investors? According to the report, they’re “broadening their searches to bolster portfolio yields. Private investors consider smaller metros as an opportunity to acquire assets while increasing the spread between returns and the cost of capital.”

Indeed, Holmes reports of helping clients in overheated sectors such as coastal multifamily to diversify. “Since January, we’ve seen a positive momentum shift,” he says, after some fourth-quarter nerves about Treasuries and trade embargoes. “But now, we’re seeing a lot of migration and clients redeploying some of their funds into retail. It’s less management intensive, especially the single tenant net-lease transactions, and it seems like a safe place to park capital at a relatively higher yield while investors consider what they want to do next.”

Breaking the overall retail market into its various formats, Holmes reports that: “Single-tenant net lease investors are still the most aggressive among our clients, given the yields and the hands-free management.

“After that comes the multi-tenant strip centers in nicer areas and with high traffic visibility, especially if they’re tenanted by internet-resistant brands. Plus, the average deal size is manageable for private buyers.”

Grocery-anchored shopping centers, especially neighborhood-type centers, are the Holy Grail these days, it seems, “favored among institutions and larger private equity.” Holmes does transact on power centers, though he admits that the format’s not as hot by any means as grocery-anchored.

All of this, of course, amounts to shocking headlines for the consumer public, so used as they are to headlines of “a retail apocalypse,” says Holmes. “They read statistics on occupancy, construction, absorption and rental-rate growth, and they realize that this is a pretty vibrant market.”