Retail Investment Volume Is Exploding

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.”

He said this is based on the out-performance of retail throughout the pandemic, the transparency of data, and the correlation of risk relative to other product types, notably industrial and multi-family.

“Retail is well poised for 2022 and will garner increased interest from institutional investors for high-quality property across the spectrum, with continued upward pressure on rents, and downward pressure on cap rates subject to interest rates and other mitigating factors,” he said.

In 2021, the retail capital markets saw a significant recovery from 2020 with four consecutive quarters of sales volume growth, according to JLL. Single-asset and portfolio transaction volumes exceeded $60.2B across 5,698 transactions last year, a nearly 58% increase over 2020 and a 6.6% decrease from 2019.

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.

“While we saw over 4,700 unique buyers during the year, institutional investors and REITs continued to dominate the top buyer list, comprising 19 of the top 25 purchasers of retail assets or 13% of total market share,” Angelone said. 

“Investors continued their multi-year migration towards quality assets with core and core plus investments making up 77% of purchases up from 59% in 2019. Average bid-ask spreads in Q4 2021 were 3.6%, based on JLL transactions and BOVs, marking the fourth consecutive quarter with positive bid-ask spreads for retail assets.

Angelone added that dry-powder remained at record high-levels through 2021, at the end of Q4 there was roughly $254B of undeployed capital. 

“Opportunistic and value-add strategies represent the largest share of available dry powder,” he said. “With continued inflation and rate hikes on the horizon it’s unlikely that this capital will remain on the sidelines and lenders should be fairly active.”

Retail: The Bond Market of Real Estate

Asher Wenig, Stan Johnson Company Senior Director & Partner, 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.”

Finding the ‘Click-and-Mortar’ Sweet Spot

Retail appears to be finding it’s ‘click-and-mortar’ sweet-spot and as a result continues to attract investment demand and capital, Eli Randel, Chief Strategy Officer, Crexi, tells GlobeSt.com.

“While growing fast, e-commerce still only represents a small portion of retail sales and in many ways is proving complementary to physical storefronts,” Randel said. “Strong foot traffic and sales in good centers can be felt when trying to find parking and investors are taking notice.”