The retail industry remains under a microscope with some suggesting that we are amid a “retail apocalypse.” Such descriptions are likely extreme, considering brick and mortar retailers are exposed to e-commerce competition to varying degrees, as evidenced by an estimated 80 to 90 percent of all retail sales still conducted in-store. Additionally, many retailers are evolving to meet the ever-changing preferences of the consumer to adapt and remain relevant. Despite the industry transition, there are opportunities in today’s marketplace that remain very attractive, especially to private investors.
In recent years, private capital has dominated overall multi-tenant retail acquisitions nationwide. In 2014, private buyers comprised 42.2 percent of this sector’s total sales volume across all markets. Since then, private buyers have taken market share from institutional investors and other buyer pools. By 2018, they represented 71.9 percent of total sales – up 29.7 percentage points. Institutional investors remain active today, yet their reduced acquisition activity is concentrated mostly in major metro areas. Private investors are also active in major MSAs, currently representing almost half the sales volume. However, most notable has been the increased investment in non-major MSAs by private buyers. In 2018, private capital represented 73.0 percent of acquisitions in non-major MSAs, whereas just four years ago, private buyers represented less than half of all sales in non-major metros. This investment by private buyers has also driven overall sales volume in non-major MSAs, with fourth quarter 2018 sales being up 29.2 percent year-over-year.
Considering the criticisms surrounding the retail industry, why are private buyers choosing to invest billions more into retail properties than they did just four years ago? And why are they placing a much larger bet on non-major MSAs, which some perceive as higher risk markets?
First, even with the scrutiny of the retail industry, many retail properties continue to provide excellent property-level fundamentals, and private buyers that don’t adhere to third-party investors or shareholders often have greater flexibility to pursue opportunities. Additionally, a lower cost of capital driven primarily by low interest rates has been readily available to all buyer profiles, allowing private buyers to be more competitive in major MSAs where cap rates are aggressive, as well as driving attractive risk-adjusted returns in non-major metros where less buyer competition exists.
Furthermore, with the near-term future of 1031 exchanges no longer uncertain and most exchange investors being private buyers, there has been a large flow of capital into the sector as these groups chase yield and cash flow. Compared to properties these investors are selling – low cap rate, management intensive properties like multi-family assets – retail is often an attractive alternative.
And finally, private investors are aggressive when purchasing opportunities in growing non-major MSAs they believe have business friendly environments, well run local governments, or strong economies. Private investors are willing to pay more for high-quality properties in these types of markets, whereas institutional investors are getting priced out. We’ve seen this trend supported by recently closed transactions that have received multiple offers from both institutional and private investors nationwide. And the private groups have consistently been 50 to 75 basis points more aggressive in pricing.
Overall, the buyer pool for multi-tenant retail has significantly changed and is no longer limited to only institutional investors, REITs, and a small subset of locally based private buyers. Today, private capital is dominating the space and chasing properties anywhere in the county that offer strong property-level fundamentals and attractive risk-adjusted returns – characteristics that multi-tenant retail assets should continue to offer for the foreseeable future.