Private investors buy up retail real estate as major players remain cautious

Private investors are snapping up shopping malls and other brick and mortar properties, a bullish sign for the besieged retail sector as it grows stronger than expected from the Covid-19 pandemic.

While many real estate investment trusts and other major players remain cautious, retail sales of real estate are on the rise in family offices, wealthy individuals, and small private equity firms. Those buyers, who are more nimble than the big companies, were responsible for nearly three-quarters of retail asset acquisitions in 2021, up 30% from the 10-year historical average, according to real estate services firm JLL.

If current trends continue, brokers expect REITs and large institutions to follow these smaller investors into the market. "We expect all major sources of capital to want access to retail," said Danny Finkle, co-head of retail capital markets at JLL.

The renewed investor interest in retail marks a turnaround for a sector that has struggled to adapt to the rise of e-commerce even before the pandemic.

The volume of retail real estate transactions in the United States rose last year to almost $ 82 billion, which is 24% more than in 2019, according to MSCI Real Assets. Enthusiasm continued in the first quarter of this year, when transaction volume reached $25 billion by April 30, up 82% from the same period in 2021.

Investors are shaded by retail in part because of demographic shifts that favor commuter shopping, as evidenced by the growing popularity of open-air malls. Meanwhile, retailers that have survived the pandemic's initial lockdowns and a surge in online shopping have found that many customers still want to shop in person.

From desired residences to major commercial transactions.

The share of e-commerce sales as a percentage of total retail sales has been falling since it jumped at the start of the pandemic. Online sales accounted for 14.3% of total retail sales last quarter, according to JLL, still higher than before the pandemic, but up from 16.4% in the second quarter of 2020.

Many retailers pay rent on time, eager to expand and, increasingly, competing for limited square footage. According to JLL, the development of new retail has been slow since 2009, and the lack of supply has begun to raise rents.

Retail investor Time Equities has noticed new and stronger competition, especially from other private investors and even hedge funds, since late 2020, according to Ami Ziff, the firm's managing director for national retail. New bidders are particularly active in bidding for grocery shopping malls and real estate in more remote parts of the country.

"Not only has the situation stabilized, but conditions have improved to some of the best fundamentals I've seen since 2007, arguably better," Mr Ziff said.

Retail real estate is attractive to investors also because prices and yields remain attractive, especially when compared to preferred types of commercial real estate, such as warehouses and rental apartments. While nearly all property types have declined since the start of the year, retail REITs have outperformed residential and industrial stocks, according to data from Bloomberg, Nareit and Green Street.

In Port Charlotte, Florida, a small City on the Gulf Coast about halfway between Sarasota and Fort Myers, a tender war began earlier this year for a 140,000-square-foot mall secured by an office depot. The center attracted 19 bidders, mostly private investors, and sold last month for $19 million, or 20% more than it was in the contract two years earlier, before the pandemic derailed the sale, according to Jim Michalak, managing partner of Plaza Advisors, a broker who represented the seller, a New York-based private equity group.

Bidding was strong in part because of the low retail supply in the area, but also because the mall's occupancy rate is 83% and Office Depot plans to leave by next year, giving new owners the opportunity to add higher-paying tenants. Mr Michalak said the buyer is confident retailers' demand is strong enough to fill the space at attractive rents, with two possible tenants already considering an anchor location.

"Private investors have switched to the acquisition of shopping centers because of the higher profitability compared to other real estate," said Mr. Michalak.

Investing in retail remains a risky business. Rising interest rates are driving down some deals, with overall sales of commercial real estate down 16% in April compared to the same month in 2021 after 13 consecutive months of growth, according to MSCI Real Assets.

But Mr Finkle and others said they expect retail assets to continue to raise capital.

"I think people are trying to figure out if a recession is coming and what the scale of inflation will be," he said. "But as long as retail fundamentals continue to work, investors will continue to invest in retail assets."