As the pandemic moves further into the rearview mirror, retail properties are becoming increasingly attractive. Daily needs-anchored retail shopping centers and regional power centers proved to be resilient through the last two challenging years, and retail is available at much more attractive cap rates than other asset classes that performed well through the pandemic, like multifamily and industrial. The dynamic is driving new capital entry into the retail space.
“During the pandemic, essential needs retail held up extremely well. That product type shined through,” Ben Snyder, EVP and national director of shopping centers at Matthews Real Estate Investment Services, tells GlobeSt.com, adding that well-located grocery-anchored strip malls and regional power centers were also resilient through the market dislocation. “New capital is chasing these product types as well.”
Private investors and high net worth individuals are the most active in pursuing retail opportunities, although Snyder has seen interest from foreign capital as well. “The capital is being mostly reallocated from multifamily,” he says. “Some investors feel like they are already pretty well exposed to the multifamily sector, and given where cap rates are on those deals and how competitive it is, there are better risk-adjusted returns for retail right now.”
By increasing allocation to retail, investors are able to stay in major metros—which has become challenging in the apartment market—or follow renter migration to secondary markets through the Sunbelt region. However, the attractive yields are what propel the bulk of the interest in the asset class. “Multifamily and industrial cap rates have gotten so tight that retail has become more attractive on a risk-adjusted basis today versus those asset classes,” says Snyder. “That is starting to drive capital back into the sector.”
New capital entry into the space is starting to erode some of the benefits. Snyder has seen the number of bidders on grocery-anchored deals more than double in the last year. While before the pandemic, eight to 10 offers were common on a grocery-anchored shopping center. Now, 20 bids are the standard. The competition has also compressed cap rates. Investors can expect cap rates to fall in the high 4% range in big cities and the high 6% range through the Midwest.
The appetite has also driven pricing to new records. “Investors that purchased retail centers in 2020 could easily resell today at a significantly better price without changing anything at the property level,” says Snyder. “The market has changed.”