There are a few important trends impacting the multi-tenant retail market right now. We’re continuing to hear from REITs that parcelization is a trend that’s here to stay, and together with our single-tenant experts, we have successfully created a parcelization marketing strategy for selling larger shopping centers. We offer the center in a combination of pieces, including the anchor boxes, outparcels, small shop space, as well as in its entirety. This strategy drives pricing and creates more marketing momentum by taking advantage of the frothy single-tenant retail market. We offer the property in smaller-sized pieces because there is limited debt for larger multi-tenant retail transactions, and fewer institutional investors are buying multi-tenant retail. The benefits to pricing can vary depending on the number of single-tenant retail offerings and the credit of those tenants.
"A parcelization strategy…drives pricing and creates more marketing momentum by taking advantage of the frothy single-tenant retail market."
Another popular trend, investors are pursuing opportunities in older strip centers. Newer developments tend to have tenants at above-market rents, but older centers can provide landlords the opportunity to grow rents as they experience tenant rollover. Additionally, these strip centers have no large exposure to anchor tenants, which require more tenant improvement dollars and landlord concessions with fewer opportunities to find a backfill.
Finally, in the Southeast, we’re seeing a large influx of relocations and capital from the Northeast. This trend isn’t new – people have been flocking to the South for a while. COVID-19 has accelerated the shift of populations and capital from dense, urban areas to the suburbs and to high-growth areas like the Southeast. This is a trend we’ll most likely continue to see, even in a post-pandemic environment.
Buying Strategies Have Been Impacted by COVID-19
It’s not a surprise that buyers are reevaluating their investment strategies in today’s environment. The shut-down of nonessential retailers in early 2020, with some markets anticipating a repeat of that this winter, has definitely taken its toll on multi-tenant retail. Power centers, with strong, essential anchor tenants such as Target, Walmart, Lowe’s, Home Depot and others, have been viewed in many situations as stable assets. Investors seeking opportunistic, levered returns with stability can find just that in smaller, financeable power centers, or those with favorable assumable debt. New developments in this space are limited, or even nonexistent, which further helps the investor and tenant demand for power centers.
Investors seeking even higher opportunistic returns are also looking at some of the troubled anchors for redevelopment options. Primarily in malls and larger lifestyle centers, anchor spaces including department stores, theaters and other large destination-oriented, entertainment-type retail boxes have become prime multifamily redevelopment opportunities because of their lot size, desirable locations and ample parking.
We’ve also seen retail-focused institutional buyers shift their strategies, at least temporarily. They’ve moved away from multi-tenant shopping centers to pursue single-tenant net lease retail assets. Due to this reduction of institutional investor competition, we have actually seen increased opportunity for private buyers in the multi-tenant retail space.
"Sellers are in the catbird seat right now, especially for top-tier, grocery-anchored centers."
Despite Shifting Strategies, Several Shopping Center Types are Still in Demand
Grocery-anchored centers remain one of the hottest asset types in the multi-tenant retail space. Investors are showing strong demand for high-performing grocery anchor tenants in desirable locations, and we saw cap rates for these centers decline in 2020 due to very limited supply.
Distressed assets are also in high demand, but again, supply is extremely limited with the exception of malls and larger lifestyle/community centers. Currently, there is more demand for unanchored strip centers with small shop space, as well as power centers with essential retailers.
Pricing Trends to Watch in 2021 and Beyond
If you’re a buyer, it is difficult to find good deals today. Supply is very limited, and when you look across the Southeast, everyone is talking about the same five to ten deals. Sellers are in the catbird seat right now, especially for top-tier, groceryanchored centers. Owners of quality real estate don’t have to discount their pricing, and demand from buyers continues to push up the pricing – at least as far as the debt markets will allow.
As we look to 2021 and beyond, we should see a significant increase in retail transaction volume. More stable assets will sell due to low cap rates, and at the opposite end of the spectrum, we should see more opportunities to buy from banks and special servicers.