The latest results from NREI’s exclusive retail real estate survey reveal that retail operators, investors and developers continue to tread carefully in a market that is fraught with challenges. Yet despite those challenges, the majority of respondents are maintaining a positive outlook for the coming year with expectations for stable and improving fundamentals, good access to capital and favorable views of retail as an attractive asset.
When asked to name their biggest concerns for the retail sector in the next 12 to 24 months, respondents to the second quarter survey replied with a litany of different responses. Increased competition from Amazon and other online retailers topped the list. Respondents also cited issues such as the reduction in the size and number of stores by larger retailers, a slow-down in a still fragile economy and changing consumer behavior. Some respondents voiced worries about overbuilding in the restaurant sector specifically, as well as a general saturation of retail across all categories. “I don’t have a lot of confidence in retailers. People are buying merchandise, but they are looking for bargains. People are not buying at full price and the retailers are recognizing that in their margins,” wrote one respondent.
Those fears have injected a note of caution into the retail real estate market, with more respondents considering this a better time to hold or sell properties rather than to buy more. In all, 44 percent believe it is better to hold, while 37 percent think it is time to sell and 19 percent said it was better to buy. “Our stance is cautious. There’s a lot going on with the Internet and mobile marketing. We think in the long run that’s going to be very good for retail, but we are definitely in a period of adjustment,” says Sandy Sigal, president and CEO of NewMark Merrill Companies, a shopping center owner and developer based in Woodland Hills, Calif.
NewMark Merrill currently owns about 80 neighborhood and community shopping centers in California, Colorado and Illinois, and Sigal expects the firm to be a net seller over the next 12 months. Although the firm will continue to invest in centers that have strong demographics, it will also sell off assets where prices have reached a peak and more reinvestment is needed to upgrade or reposition a property. “I really don’t see us buying as much over the next year until we get a good sense of what’s happening with interest rates and politics and those kinds of things,” he says.
Yet while many owners are treading more carefully, retail is still viewed as a desirable asset class. When asked to rate the attractiveness of each property type, retail trailed behind multifamily and industrial, but came out ahead of office and hospitality.