Retail Turns Heads of Big-Time Investors Once More
As the retail market in the U.S. continues to strengthen, it's catching the eye of investors big and small. The retail landscape appears to be shifting from a tale of recovery to one of rarity. It seems more stores are closing or shrinking their operations than opening or expanding. Despite this, an interesting twist is that the vacancy rate remains low at a mere 4.4%, a reflection of the paucity of new construction in this sector.
What makes retail even more appealing to investors is the promise of higher yields than other commercial real estate sectors. The first quarter saw over $15 billion in transaction volumes, a 5% increase compared to the same period the previous year. This marked the highest first-quarter transaction volume in several years.
Alpha Wolves Are Back and Hungry in the Retail Market
"The alpha wolves are back, and they're waking up hungry," these words were shared by Paul Kurzawa, the president and incoming CEO of a retail owner and operator. He believes that the upturn in equity and debt market fundamentals is spurring the hunt for strong double-digit returns over short- to mid-term holds. These returns can outperform the market indexes by 150 to 200 basis points. But, according to Kurzawa, the real change isn't just that capital is flowing back into retail; it's that investors are becoming much more discerning about where they're putting their money.
Kurzawa, who manages a portfolio that spans 25 million square feet across 18 states, has noticed something else. Investors, particularly institutional ones, are developing a taste for core+ assets. These are high-end assets that are still considered low-risk and suitable for long-term investment. This trend is so strong that nearly one-quarter of multi-tenant retail investments over the past year have come from institutional investors. This is the highest share of investment from this group since 2017.
Size Matters: Bigger is Better
It also appears that size does matter in retail investment. In fact, deals worth over $100 million made up 26% of retail investment from the start of the previous year right through to the beginning of the current year. This is a significant increase from just 13% a few years ago. Kurzawa noted, "Many institutional investors are still under-allocated to retail compared to other property types." As more capital becomes available, investors are seeking larger portfolio and high-quality acquisitions to use their capital more efficiently and meet allocation targets quickly.
The issue, according to Kurzawa, is that there simply aren't enough high-quality assets available for trade. This unevenness between high investor demand and limited supply is sparking heightened competition, especially in the realm of deals exceeding $100 million. He also mentioned that while investing in properties that need upgrading can be a little more complicated, he's witnessing more capital being funneled into this area as well.
The shift in investor mindset is also apparent. They're asking the tough questions about where they can realistically generate value, such as by diversifying uses or repositioning assets. "Investors are no longer willing to rely on hope over solid math. If the deal requires too much optimism and not enough arithmetic, it's not going to happen," Kurzawa added.
As the retail market in the U.S. continues to strengthen, it's catching the eye of investors big and small. The retail landscape appears to be shifting from a tale of recovery to one of rarity. It seems more stores are closing or shrinking their operations than opening or expanding. Despite this, an interesting twist is that the vacancy rate remains low at a mere 4.4%, a reflection of the paucity of new construction in this sector.
What makes retail even more appealing to investors is the promise of higher yields than other commercial real estate sectors. The first quarter saw over $15 billion in transaction volumes, a 5% increase compared to the same period the previous year. This marked the highest first-quarter transaction volume in several years.
Alpha Wolves Are Back and Hungry in the Retail Market
"The alpha wolves are back, and they're waking up hungry," these words were shared by Paul Kurzawa, the president and incoming CEO of a retail owner and operator. He believes that the upturn in equity and debt market fundamentals is spurring the hunt for strong double-digit returns over short- to mid-term holds. These returns can outperform the market indexes by 150 to 200 basis points. But, according to Kurzawa, the real change isn't just that capital is flowing back into retail; it's that investors are becoming much more discerning about where they're putting their money.
Kurzawa, who manages a portfolio that spans 25 million square feet across 18 states, has noticed something else. Investors, particularly institutional ones, are developing a taste for core+ assets. These are high-end assets that are still considered low-risk and suitable for long-term investment. This trend is so strong that nearly one-quarter of multi-tenant retail investments over the past year have come from institutional investors. This is the highest share of investment from this group since 2017.
Size Matters: Bigger is Better
It also appears that size does matter in retail investment. In fact, deals worth over $100 million made up 26% of retail investment from the start of the previous year right through to the beginning of the current year. This is a significant increase from just 13% a few years ago. Kurzawa noted, "Many institutional investors are still under-allocated to retail compared to other property types." As more capital becomes available, investors are seeking larger portfolio and high-quality acquisitions to use their capital more efficiently and meet allocation targets quickly.
The issue, according to Kurzawa, is that there simply aren't enough high-quality assets available for trade. This unevenness between high investor demand and limited supply is sparking heightened competition, especially in the realm of deals exceeding $100 million. He also mentioned that while investing in properties that need upgrading can be a little more complicated, he's witnessing more capital being funneled into this area as well.
The shift in investor mindset is also apparent. They're asking the tough questions about where they can realistically generate value, such as by diversifying uses or repositioning assets. "Investors are no longer willing to rely on hope over solid math. If the deal requires too much optimism and not enough arithmetic, it's not going to happen," Kurzawa added.