Retail Activity Moves Toward Secondary Markets, Less Volatility Expected

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Despite the economy’s ups and downs, retail transaction volumes were strong in secondary markets where population and job growth continued to fuel demand in the first quarter of 2016. According to JLL’s U.S. Investment Outlook, the retail sector will likely not see as much volatility as the year progresses while these burgeoning markets and new supply open opportunities for capital that remained dormant in the beginning of the year.

Investment Volumes

“The U.S. economy experienced volatility in the beginning of this year, and the retail sector reacted in line with trends seen in the country’s macroeconomic environment,” said JLL Managing Director Dave Monahan. “But on the whole, we expect volumes to remain healthy as investment flows adjust to changing dynamics in gateway and secondary markets.”

Primary market activity — with the notable exceptions of Los Angeles and Chicago, which were the first and third most active retail markets for the quarter, respectively – declined after significant gains in recent years. However, that benefitted secondary markets, which garnered $388.7 million in investment, or a near 187-percent increase.

Markets like Denver and Kansas City stood out for their huge increases in volume, 192 percent and 881 percent over comparable 2015 figures, respectively. While much of Kansas City’s volume came from the $723.4-million sale of Country Club Plaza, both cities show the potential for investment as populations continue to grow at a steady pace.

“Private capital and REITs who were once interested mainly in primary markets are beginning to target secondary markets that are experiencing steady population growth and the potential for higher yields,” said JLL Managing Director Margaret Caldwell.

Added Monahan, “Underwriting standards for burgeoning secondary markets have loosened a bit as demand has grown, making it easier for REITs and even foreign investors to justify placing their capital there.”

Those smaller markets are benefitting from consumer surges tied to low oil prices. As JLL Managing Director Jimmy Board notes, middle class folks in smaller markets tend to benefit most from paying less at the pump, and in turn have more discretionary income. That, combined with the fact that online retailers continue to lease brick and mortar locations, has allowed retail to remain attractive.

“We are seeing a lot of liquidity in the retail space right now as CMBS stabilizes and debt funds, life companies and banks continue to seek out opportunities,” said Board. “For these investors, it’s not only about a specific market, it’s about the make-up of a deal and its potential.”

Though supply remained limited in the first quarter—especially in major markets, this is on course to change as the year progresses. Overall development activity increased 18.1 percent year-over-year with 29.4 million square feet coming online in the coming months.

That will likely ring true for markets like New York and Miami, too, which both saw lower volumes in the first quarter as Trophy opportunities remained limited and rents at a premium. The two cities have the highest rents in the country, ranked first and secondary, respectively, and owners of Trophy product are maintaining long-term hold strategies.

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