Beyond 'Retail-Curious,' Investors Are Ready For A Store Spending Spree
Like a Black Friday shopper trawling the aisles for deals during the holiday shopping season, retail investors are circling, keeping a keen eye out for the right opportunity as the asset class's performance makes it a must-have heading into 2025.
Strong fundamentals and demonstrated resilience over a challenging 15-year stint have positioned the U.S. retail sector to capture an outsized portion of the nascent commercial real estate capital markets recovery.
While sales volume in 2024 is basically flat from a weak 2023, market activity is picking up and expected to grow significantly in 2025.
“We went from the kind of retail-curious phase to retail-serious, which is a little bit of a silly thing to say, but it's really transitioned to investors trying to put capital in retail,” said Erin Lazarus, director of the JLL Capital Markets Dallas office.
Retail sales volume through the third quarter totaled $25.8B, keeping pace with last year but well below historical levels, according to a November report from JLL. The sector’s lackluster performance is reflective of broader market malaise brought on by high interest rates and macroeconomic uncertainty. Total commercial real estate transactions totaled $351.6B in the 12 months ending in September, down 15% from a year prior, according to CBRE.
But the Federal Reserve’s move to cut interest rates in September and the end of the election cycle are expected to bring clarity to the capital markets and propel transaction volume through 2025.
As investors come off the sidelines, they are increasingly eyeing retail assets that have continued to draw foot traffic despite pandemic setbacks while proving to be resistant to pressures from online shopping. The interest hasn’t yet translated to closed deals, but brokers with national portfolios at four major brokerages told Bisnow their deal pipelines are quickly growing.
“I have 60-plus brokers that we oversee and our support staff, and they're not depressed,” said Matthew Mousavi, co-head of national net lease at SRS Real Estate Partners.
More buyers are expressing interest in properties, and there is an expectation that the incoming Donald Trump administration will have an agenda that is supportive of the real estate industry.
“Their incomes are down, but they're pumped up,” Mousavi said.
Retail assets have been drawing more recent investor attention in part because the sector has largely emerged from the pandemic unscathed, despite some predictions that lockdowns would permanently shift consumer habits away from physical stores.
U.S. retail vacancy at the end of the third quarter across all asset types was 4.1%, among the lowest total vacancy rates recorded in the last two decades. Nationally, asking rent growth averaged 2.3% year-over-year, and popular markets including Tampa, Florida, Atlanta, Dallas and Phoenix have all seen asking rents rise more than 4%, according to JLL.
“What really happened was Covid,” Lazarus said. “Everyone got a little bit nervous about what the future of retail would look like, and we ended up coming out of Covid as strong as we've been in a very long time.”
Tight availability is expected to remain a key market driver because new construction starts have been on a long downward slide since 2015 and are at their lowest point in the last 15 years, according to JLL.
Some of the country’s 12B SF of existing retail space is also being decommissioned or converted as developers look to breathe new life into old malls with mixed-use schemes, although the projects have faced hurdles and haven’t yet become widespread enough to be felt in the broader market.
The limited available space has helped blunt the impact of some high-profile bankruptcies this year, most recently Red Lobster and TGI Fridays, but also hardware store True Value, craft retailer Joann and mall staple Express.
In many cases, brokers and landlords are happy to see a long-term tenant leave because they can replace locked-in low rents with tenants paying today’s higher market rate.
“All of us in this room would love to own some Red Lobsters,” said Chris Decouflé, managing director for U.S. retail capital markets at CBRE. “Red Lobster and, before that, Bed Bath & Beyond were tremendous opportunities to recapture really good space that was cheap. You don't get that very often.”
Forecasts show market fundamentals largely holding steady, with CoStar projecting a slight uptick in vacancy next year as 10M SF of new construction comes online followed by a decline below current levels through 2026.
With the office sector weighed down by occupancy issues, multifamily facing questions around rent growth and a wave of new industrial supply coming online, retail assets are looking more attractive in today’s environment, Lazarus said.
“Fundamentalswise, looking at just the pure performance of these assets and how bankable that cash flow is, that’s what really generates those discussions” about retail acquisitions, she said.
Capital is flowing toward retail from several corners of the investment world, brokers said. The institutional capital that was spooked by the pandemic is beginning to return just as private equity increases allocations toward the asset class, attracted by its relative stability.
More investors are looking to acquire assets — grocery-anchored retail and well-located unanchored plazas are attracting the most interest — and the private buyers that previously dominated the marketplace are now more frequently competing with institutional investors, Lazarus said.
“There's perhaps more new entrants interested in investing in retail at this moment than there have been for the past 10 years,” said Wright Sigmund, managing partner at The Sigmund Cos., a retail investment firm based in Washington, D.C.
Brokers and analysts also expect REITs to become active buyers again in 2025, after having spent the last two years on defense, optimizing assets, tenant rosters and cash flows to protect values.
Retail REITs led all REITs in occupancy and dividend distributions in the third quarter, according to Nareit. The five largest retail REITs — Simon Property Group, Realty Income Corp., Kimco Realty Corp., Regency Centers Corp. and Federal Realty Investment Trust — have seen their stocks rise anywhere from 8% to 55% in the last 12 months, with the group averaging a 29% bump in value.
“When your stock has appreciated 20% in 2024, you will lean into buying because there's not a lot of growth left in your existing portfolio,” said Mark Gilbert, vice chairman of Cushman & Wakefield’s retail capital markets group.
Investors are shifting their attention toward retail assets despite potentially problematic policy proposals promised by Trump on the campaign trail. Economists warn that a plan to impose broad tariffs on foreign goods, including products from China, Mexico and Canada, could cause inflation to surge back.
Those concerns come as the Fed’s preferred measure of inflation, the personal consumption expenditures index, ticked up 20 basis points in October to 2.3%. Analysts had forecast the increase, but it signals that the Fed’s battle against inflation may not yet be won, and some economists are predicting the Fed will take a more cautious approach to cutting its benchmark rate under the Trump administration.
Investors began coming to grips last year with the likelihood that the Fed would keep rates higher than the rock-bottom levels that persisted after the Global Financial Crisis.
Trump’s arrival in the White House could mean that the floor is lifted higher, but Gilbert said the shift was unlikely to impact retail pricing because any price erosion from higher borrowing costs would be offset by the sector’s strong fundamentals.
The retail sector is especially vulnerable to the whims of consumers, but that also means it benefits when shoppers open their wallets, and Gilbert doesn’t expect consumers to start tightening their budgets significantly anytime soon.
“Until we see massive corporate layoffs, the consumption in America is going to remain strong,” he said.
