Retail Property Sector Poised for Significant Activity Through 2022

The retail sector continues to experience bullish investors as it has proven to be a strong asset class overall. While in 2020 many investors as well as the greater real estate and retail community thought Covid may have squelched the sector for good, the perceived risk in retail investment properties has steadily been diminishing from where it was 12 to 18 months ago. In fact, year-to-date, sale activity for retail properties with prices greater than $10 million in the Western U.S. has been $5.5 billion, with 27% or nearly $1.5 billion of that in the months of September and October combined.

The reason for this is twofold. First, there was a relatively quick shake-out of poor retail performers in 2020. Second, the retail survivors have proven their sustained strength. With that said, a recent ICSC report shows at least 10 months of collections exceeding 90% for retail centers overall and a recent TREPP report shows the lowest level of watch-list loans on retail centers in years. What this means is that the pandemic did not result in a retail apocalypse – the fear that there would be wholesale failures in retail turned out to be unfounded.

The most coveted retail asset is by far grocery-anchored centers as the risk-adjusted returns warrant attention. Grocery-anchored retail remains a darling in the investor community and is trading at pre-Covid cap rates and in certain instances, lower cap rates than before the pandemic. This is driven by the strength of grocery sales overall, lack of inventory, increased buyer demand, low interest rates, and debt markets opening up for grocery-anchored retail product. We will likely see more aggressive moves by buyers on grocery-anchored product to fill their pipeline.

Next in priority after grocery-anchored retail, investors are considering unanchored strip retail and power centers. Returns on unanchored strip retail centers are attractive and investors are looking harder at these deals over recent months. The mitigating factor for unanchored strip centers is that they tend to be smaller, yet require the same amount of management attention, therefore more resources are necessary on an investment-per-dollar basis.

Power centers are attractive from a return basis. Pre-Covid they were less favored, and despite relative resiliency during that time, investors are still skittish about the long-term stability of their anchors. Some REITs and operators with depth in this asset class are gradually starting to transact.

Ultimately, all signs point to 2022 being a very interesting year for the buyer, seller, retailer and the capital markets communities. We expect to see more transaction activity now through 2022 as sellers will choose to move some properties resulting from the momentum of buyer interest being in their favor, and with interest rates remaining historically low.