Consumer Shopping Patterns Favor Single-Tenant Assets

Current consumer spending priorities favor single-tenant assets as Americans continue to dine out, and of course, purchase essential goods, according to a new report from Marcus & Millichap.

The firm said continued inflation, labor market concerns, and high-interest rates are influencing households to prioritize social interactions “over big-ticket items that were popular during lockdowns.”

For example, in March, restaurant and bar spending was up 13 percent annually, and in Q1, sales in stores — not including restaurants — were up more than 4 percent year-over-year.

This spending has led to increased levels of consumer debt, which was 2.1 percent above the year-end 2019 mark, on an inflation-adjusted basis. This debt does create some risk, Marcus & Millichap says, but overall, the labor market has remained resilient as above-average job creation has kept unemployment at a multi-decade low.

In fact, also in March, wage growth topped inflation for the first time in more than two years.

Marcus & Millichap sees discount retailers exceeding expectations as consumers are more willing to change where they shop in their quest for pricing relief.

Dollar stores and other lower-priced retailers are benefiting, with foot traffic at discount stores up more than 2 percent in Q1 2023 when compared to the same stretch last year, according to the report.

Dollar-store brand options are expanding, too, with the national count of these shops up by 4.4 percent last year. This year, Dollar General plans to significantly grow its pOpshelf concept and Five Below intends to open 200 new stores, including some in urban and semi-rural settings.

However, capital costs elevated by tightening policies from the Federal Reserve have constrained transaction velocity for retail and other property types.

“This has reduced the flow of investment into single-tenant net-lease assets from 1031 exchanges,” according to the report.

Jaime Sturgis, CEO of Native Realty, tells GlobeSt.com that single-tenant net leases that were executed in the 4% caps are less enticing as they typically have very structured annual increases, which do not keep pace with current inflation or CPI.

“We are seeing increased demand for different retail uses that have more diversification in their rent roll, such as neighborhood retail centers, which typically have leases that increase annually, versus some corporate leases which only increase every 3, 5 or 10 years,” Sturgis said. “These neighborhood centers also have a diversified tenant mix, so all the eggs are not in one basket.”

He said these neighborhood centers are outperforming the broader market with their lower vacancies and high year-over-year rent increases.