As commercial real estate enters its sixth year of growth and volatility heightens in the public equity market, questions are beginning to surface as to how much longer this can continue. But investors show no signs of slowing as they satisfy their hunger for urban retail, potentially positioning 2015 as the highest year on record for the subsector outpacing a record year in 2014, according to JLL’s Q3 2015 Investment Outlook released today at the International Council of Shopping Centers (ICSC) New York Conference.

Highlights from the report include:

• Retail sales transactions total nearly $59 billion year-to-date, a 10 percent increase from the previous year.
• This quarter’s average pricing per square foot was the second highest quarter on record since 2001 at $522 per square foot, reflecting quarter-over-quarter gains of 8.1 percent.
• Primary retail investment market cap rate compression is outperforming the U.S. market-at-large with 80 percent of the primary markets seeing cap rates compress 20+ basis points year-to-date.

“The heat we’ve experienced in urban markets has been going on for a while. We expect to easily surpass 2014 levels and break sales records this year,” said Margaret Caldwell, Managing Director of Retail Capital Markets, JLL. “With nearly $10 billion in urban sales closed so far, much of this volume can be attributed to deals in markets like New York and Miami, which continue to be key cities for both domestic and international consumers and buyers. Both are experiencing average per-square-foot pricing exceeding $2,000, while urban locales as a whole are enjoying an average 200 basis-point premium over secondary markets.”

Retail Renaissance in the Urban Core
Premium mall purchases lifted sales volumes during the first quarter of 2015, but steady gains in urban retail investment have boosted overall sales in the latter half of 2015. The urbanization of consumers, particularly Millennials and empty-nesters, is driving both private investors and retailers clamoring for urban space located in or around mixed-use developments. As a result, urban investment has taken up an increased proportion of transactions (nearly 22 percent of year-to-date) with investment volumes totaling near $10 billion.

Investors Gobble up Grocery-Anchored Assets

The grocery industry is seeing increased competition as more players enter the field, and consumers who once purchased all their groceries in one location are now splitting their shopping between as many as five stores. Investment into grocery assets makes up 20 percent of total retail investment volume to date, reaching nearly $9 billion year-to-date, an 8.5 percent increase over last year.  Grocery assets in primary markets are the darling of investors, with a 57 percent jump in investment year over year.

“Investors are willing to pay a premium for assets in markets with healthy demographics, strong income growth and robust tourism,” added Dave Monahan, Managing Director of Retail Capital Markets, JLL. “Going forward, retail investment will continue to follow the rooftops, particularly in markets with a strong international presence that supports high-end urban retail. Expect to see 2016 levels have a slight uptick, piggybacking on a strong 2015 close.”