Today’s metrics will tell you the retail sector is in shambles. However, a nuanced examination of recent performance reveals a mixed picture. While sales volume and investment activity in April 2023 are down 75% compared to the same period last year, it’s important to remember that the exceptional rebound experienced in 2022 was fueled by pandemic revenge spending. Consumers who had been shut in were eager to spend, and the cashflow revival proved to investors that their worst fears of 2020 weren’t realized. Demand had not disappeared; it had simply been repressed.
Another propellant of last year’s investment rebound was the cushy 500 basis point spread between cap and interest rates. As of April this year, that spread has reduced to 295 basis points as the 10-year treasury has risen considerably. It’s harder for investors today to be as excited as they were not long ago.
Underwritten deals must show steady or above-average income growth. Herein lies the primary concern for retail: predicting income stability moving forward as the rebound from the pandemic has played out to some extent. In a time when the economy’s next steps are uncertain, underwriters are going to be especially conservative.
Across the various classes, distressed assets seem to be a hot commodity for current investors. The retail industry’s response to the 2008 crisis, characterized by finding distressed cash-flowing assets, acquiring them at low prices, and benefiting from value recovery, does not necessarily translate well to the current retail landscape.
Many of the distressed assets today are suburban retail centers that were overbuilt across America in the boom period of the 70s and 80s. Successful navigation of this challenging environment requires a deep understanding of the local economy and zoning regulations. There isn’t a one-size-fits-all approach.
Amidst these challenges, there are still opportunities to be found in the retail market. Areas with strong local income growth, constrained new supply and/or high barriers to entry offer potential avenues for success. Identifying these opportunities and adopting a tailored approach can help overcome the stress and uncertainties of the retail markets.
- Richter, J. (2019, September 25). Real Estate Daily Beat. Daily Beat NY. Retrieved June 2, 2023, from www.dailybeatny.com
- Bull, M., & Costello, J. (2023, May 24). Retail Cap Rates Today. Spotify. Retrieved June 2, 2023, from www.spotify.com