With Congress’ recent passing of the Tax Cuts and Jobs Act, growth domestic product (GDP) growth in 2018 is expected to exceed last year’s increases which bodes well for the retail sector. Overall commercial real estate transaction volumes have exceeded expectations, but investment into retail assets reached just $12.8 billion January to April 2018, according to JLL.
JLL recorded a 46 percent decline of investment into retail assets in the first part of the year. This is largely attributed to investor caution and the perception that current retail returns are not commiserate with current valuations.
“Many investors are either allocating their capital into other property types, to debt versus equity, or taking a temporary pause,” said Naveen Jaggi, President of Retail Advisory Services, JLL. “We’re pragmatically optimistic of today’s market, and are seeing investors begin to rebuild their confidence in the sector as fundamentals strengthen. Vacancy is stabilized at under five percent nationwide and rents have reached pre-recession levels.”
- Strong Fundamentals: Major markets are still showing stronger fundamentals when compared to the United States as a whole, but even those top tier properties are seeing impacts of retailer fallout. Rents continue to rise but remain inconsistent across major markets.
- Limited Supply: Retail construction remains limited with only 14.2 million square-feet delivered so far this year –concentrated in general retail, with less than one-third of new construction occurring in the shopping center and mall space.
- Steady Leasing: Absorption remains in line with 13.4 million square-feet absorbed through April. However, some property types are starting to see rising vacancy rates, with shopping centers still remaining the highest at 7.3 percent, but has seen steady declines since the recession.
Although fundamentals are improving, investors were slow to close transactions at the start of 2018, and there is a large amount of capital looking to be deployed into retail. “Sellers are under more pressure to sell, than buyers are to buy. There is tremendous opportunity unfolding to buy quality retail at a discount to historical values – at the asset level and in the public markets – REITs are trading at 2008 levels,” added Jaggi.
Given the limited amount of core product available, investors maintain a wide geographic purview for potential acquisitions, seeking growth opportunities. Aside from best-in-class assets, cap rates continue to soften with the market less willing to compromise on pricing and underperforming retail product continues to trade for high cap rates in secondary and tertiary markets.
“We’re dealing with a buyer pool that seems to be getting smaller and smaller with a pricing delta that’s widening, which is causing a notable pause in transactions getting over the finish line,” said Chris Angelone, Retail Investment Sales Lead for JLL. “But it’s not just the bid-ask spread that’s off-kilter, we’re seeing a lack of buyer conviction for decent, quality and stabilized assets nationally.”
JLL found that there is some opportunistic retail acquisition interest, which hints that institutional capital is actively looking for opportunities in the coming 12 months. Whereas, investment from real estate investment trusts (REITs) lagged in the first quarter, REITs are more active on the sell-side, looking to divest non-core assets. Although debt is available, interest rate increases are having an impact on retail asset valuations, causing a delay in transactions.
“There isn’t a definitive jumping-in point for transaction volume to accelerate, but as we head into the back-half of 2018 we expect transaction activity to pick up due to market capitulation and investor confidence finding solid footing. There is more capital than product, which is unfolding a tremendous opportunity to buy at a discount to recent valuations,” concluded Angelone.