Retail Investment Sales Faring Better Than Expected

Early in the pandemic, given the closures and restrictions in many metro areas and the ascendency of e-commerce, retail looked as though it would quickly be down for a long count. But, as MSCI points out, sometimes things don’t work out quite as you expect.

“Retail property sales performed better than many other sectors for November,” they wrote. “Volume fell less than it did for other property types and prices were not down as sharply. Sentiment was negative for the retail sector early in the pandemic, but as some of the worst fears for the sector were not realized, investors have been pursuing targeted investments in the sector.”

The sector did much better — maybe because people are inherently drawn to the social aspect. Perhaps they find that many types of products are more difficult to buy remotely than those promoting e-commerce would think because you can’t necessarily gauge the quality, fit, or other characteristics important to a consumer. And, of course, people got insanely tired of being locked up by themselves.

For whatever set of reasons, in the third quarter of 2022, e-commerce was 14.1% of total retail sales, according to Census Bureau data. In the third quarter of 2023, using preliminary measurements, e-commerce was 15.6% of retail using seasonally adjusted numbers. A significant increase, but still, that vast majority of retail purchases happens off-line. Companies by and large must have stores, which means real estate.

“Deal volume [of real estate properties] for the retail sector fell 32% from a year earlier in November,” they wrote. “A decline is never a hopeful sign, but this drop was much shallower than the 60% decline in November for commercial property in total.”

The relative health of retail CRE transactions was largely also more resilient than other sectors. Total retail was down 32% year over year. Centers were off by 35%; shops, 27% down; and single asset only by 18%. Portfolio and entity was where the problems were visible, down 84%. However, is that bad or good? If investors can see solid NOI in areas of retail that are relatively strong, maybe selling isn’t the first thing on the mind of the property owners. If people don’t sell, then of course volume will be down.

On a year-over-year basis for 2023 year to date, total retail was down 39%; centers off by 52%; shops, by 11%; single asset, off by 47%; and portfolio and entity, only down 9%. Perhaps another reason why the year-over-year figure for the latter was so high in November is because much of the sales already happened.