After years of cautiousness, institutional money is trickling into the retail sector. Amid the pandemic, retail space’s resilience demonstrated its occupancy, tenant-demand rebound and rent growth strength. Today, owing to the high costs of capital and a lack of new construction, shopping center foot traffic is on the rise, and vacancies are minimal.
During Q2 2023, commercial real estate investment fell 64 percent to $75 billion as tighter underwriting and higher rates stifled upsides for borrowers and lenders. In response, retail transactions declined more than 67 percent. Despite this challenging landscape, the retail sector’s comparatively strong yields provide a glimmer of optimism.
Annualized returns across various property types dropped to -6.6 percent. While industrial and multifamily property returns decreased to -4 percent and -5.1 percent, respectively, the retail sector experienced a more moderate decrease of only -0.9 percent.
The latest Reuben Brothers deal is just one industry example of opportunistically transacting in the retail sector. Earlier this week, the private lending firm purchased a $124 million retail portfolio consisting of several Manhattan locations from Vornado. Reuben Brothers also recently sold an 11,000 square feet retail co-op at the corner of 65th and Madison to a UK-based firm. In the last two years, 97 large retail centers and enclosed malls traded hands.
Prior to the pandemic, several significant issues plagued the retail space. An excess of supply coupled with the rise of e-commerce led to a wave of closures, only exacerbated by the pandemic. These events resulted in a natural filtering process, leaving behind a smaller pool of tenants THAT who demonstrated their ability to withstand the worst scenarios. Consequently, the retail space is more efficient, and healthier for it.
So, will retail be the most successful asset class of the next five years? Although unlikely, the future of retail looks brighter than it has in a long time.
- Lueckemeyer, O. (2023, August) “Optimism is Returning to Battle-Tested Retail Sector – But More Importantly, So Are Investors”. Retrieved August 18, 2023 from www.bisnow.com
- Richter, J. (2023, August). Real Estate Daily Beat. Daily Beat NY. Retrieved August 18, 2023, from www.dailybeatny.com