Investor interest in retail has been on the upswing over the past few months. Despite possible signs of slowdown and increased interest rates, investors appear to still be bullish on the sector, according to recent data from Crexi. Mike DeGiorgio, founder and CEO of Crexi, says this points to a sector that's shaking off contraction over the last few years.
"We think retail has (mostly) recovered from the early days of the pandemic – and, in many instances, has thrived," says DeGiorgio. "Our data demonstrates that retail is showing significant liquidity right now, even with occasional compressed yields versus other asset types."
His company's data and insights platform, Intelligence, saw offers for retail properties rise 14.6% from Q4 2021 to Q1 2022. Q2 retail offers have been coming in at a similar if not stronger pace, as the number of retail offers on Crexi's platform in April exceeded a third of the number of offers in the entire first quarter of the year.
DeGiorgio notes retail buyer activity on Crexi was up 25% quarter-over-quarter – representing the largest spike in buyer interest on the platform (nearly doubling the performance of multifamily, the second-highest sector). Meanwhile, retail tenant interest jumped 166% in the same period.
Retail Staying Strong Under Pressure
Retailers have taken to downsizing their square footage, which makes the overall upward trajectory of these figures all the more dramatic. Retail tenants are striving to be more efficient and do more with less because of pandemic-era pressures – like retail talent shortages and increased e-commerce demand – by pivoting to smaller spaces powered by click-and-mortar operating models. DeGiorgio says the data points to the retail real estate market as a whole still wanting more.
"Many retailers are getting smart about narrowing their footprints because with increased pedestrian traffic, people are seeing an item in-store then ordering it online," says DeGiorgio. "As a result, stores need less room to house inventory and retailers can house that same inventory at less expensive distribution hubs. Smaller footprints may mean fewer employees, further decreasing operating costs."
Retail supply and pricing are playing catch up to meet the increased demand head on. The average asking price for retail assets on Crexi increased more than 3.8% from Q4 2021 to Q1 2022 (from $303.81/sf to $315.50/sf); retail asking prices in April were up 6.5% from March to April. Moreover, retail real estate remains his platform's most numerous and popular asset type.
How Long Can It Last?
Still, good times don't last forever – at least not consistently. Inflation is high, consumers are getting financially squeezed, and the threat of recession is no longer spoken of in whispers. DeGiorgio acknowledges the bumps in the road ahead, but remains optimistic on retail investment – citing the still-substantial money supply and favorable NNN lease provisions typical to retail.
"The supply of capital and transitioning wealth looking for investment opportunities will create a competitive environment for acquisition and will help sustain value – [as will] rent provisions built in to increase with inflation, contributing to expanded property income," says DeGiorgio. "I think we'll see some softening around the edges but healthy values and transaction levels from a historical perspective."
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