JLL Q3 Retail Investment Outlook finds YTD investment sales growth rises 36.1 percent
Transactions volumes total $56.9 billion YTD

Retail transaction volume totaled $56.9 billion year-to-date at the end of Q3 2018 according to the Q3 U.S. Retail Investment Outlook released today by JLL at the International Council of Shopping Centers (ICSC) New York Conference. Volumes were paced by two major deals this year, Brookfield’s purchase of GGP in Q3 and Unibail-Rodamco’s purchase of Westfield earlier this year. As a result, year-to-date investment sales grew by 36.1 percent, by far the largest growth rate of any property sector so far this year.

Aside from the boost in mall transaction volume, due to the previously mentioned high-profile transactions, urban retail assets were the other property type to mark an increase in liquidity thus far in 2018, with volumes rising by 7.8 percent. Outside these major transactions, liquidity for individual non-core mall assets remains limited, with these assets often fetching double-digit cap rates. This is true of all retail however, not just the mall sector, as mounting bankruptcies are leading to some softening in overall fundamentals.

“The sector has shown steady fundamentals and growth this year overall with vacancy compressing nationally to 4.5 percent in the third quarter,” said Naveen Jaggi, President of JLL Retail Brokerage and Capital Markets. “As is typical for this time of year, bankruptcies are starting to increase, and we expect that to slow down overall volumes somewhat as investors will wait on sidelines. That said, developers have done a good job of managing pipeline activity as construction starts slowed by 11.1 percent from the same quarter last year. This, coupled with what should be an incredibly strong holiday shopping season, should help easily control vacancy in early 2019.”

Markets
Primary markets saw relatively stronger activity compared to secondary ones, even excluding the two aforementioned major transactions. New York and Los Angeles led primary market investment, with 35.7 percent and 18.3 percent growth in transactions, respectively, including assets from those major acquisitions. Grocery was one of the better performing sectors, with momentum in non-gateway primary and secondary markets that are experiencing notable employment growth. Seattle, Northern New Jersey and Atlanta led the way in the third quarter in this regard.

Sources of Capital
The retail sector overall has seen consistent interest in from institutional capital, but volatility in non-core asset pricing and the scarcity of core deals is slowing transaction momentum for this group. As a result, acquisition volume from institutional investors declined by 36.0 percent. However, private net worth and developer-owner investment is off-setting that a bit, having increased by 29.3 and 9.5 percent respectively due to those investors’ willingness and ability to take on smaller, higher-yielding transactions outside of primary markets.

“Core assets in strong primary and secondary markets will continue to gain the most attention as we move through the end of the year and into 2019. Private investors are generally focusing on transactions under $100 million, with institutions waiting for core assets to scale and come to market – which we expect to continue into early 2019. Malls in non-core markets will likely continue to struggle to find purchasers in the short-term, however investor appetite is slowly mounting as malls futures are looking brighter through creative re-use of some of their spaces and an influx of potential new tenants as maturing digital-native brands start to take up space,” Jaggi concluded.