With consumers shifting how they shop and scores of store closures and retail bankruptcies, retail property owners across the U.S. are grappling to adapt. However, capital market experts say there are still ample opportunities for investors in the retail sector.
Despite challenges including e-commerce competition, there are bright spots when it comes to physical retail. For example, just 80 million sq. ft. of new retail space is under construction in the U.S., according to research firm the Costar Group. That’s helping keep vacancy in check. Research firm Reis reported the retail vacancy rate averaged 10.2 percent in the fourth quarter of 2019.
Despite its struggles, the retail real estate sector still accounted for $62.5 billion in investment sales volume in 2019, reported research firm Real Capital Analytics (RCA). While that’s down 28 percent from 2018, that’s largely because there were no entity-level deals closed last year.
Looking past such mega-deals to the sale of individual properties, the picture of the retail real estate market stabilizes, RCA researchers note. Investors are “voting in favor of the sector through a growing pace of acquisitions one building at a time.”
While gateway cities like Los Angeles, New York and Boston are the obvious markets that come to mind as investment options, deal activity is growing in secondary markets that are boasting lower costs and better yield opportunities than the six major metros, RCA reported.
That’s not to say there isn’t significant activity in top-tier cities.
“While the Los Angeles, New York City and Boston markets may be seen as overpriced to some investors, the sheer volume of transactions and historical price appreciation over five decades solidifies the reason investors continue to place funds in these markets,” says El Warner, executive vice president of capital markets at real estate services firm Colliers International.
Further, there are extreme barriers to entry in developing new retail centers in these markets, but heavy population densities and high incomes, he notes.
“In essence, the supply of assets available [in these gateway cities] is flat and with continued demand for leasing and sales, this trend continues,” Warner adds.
Secondary markets pick up steam
“When we look at retail opportunities, we look at where the people are going, so if you follow the demographics and the jobs, a lot of that activity is around the baby boomers and the millennials,” says Melina Cordero, managing director of CBRE’s retail capital markets business for the Americas.
Baby boomers are moving to places like Florida, Texas and Arizona—warm and affordable cities with low tax rates. Meanwhile, a lot of millennials are moving to affordable secondary cities including Houston and Austin in Texas and Denver, Cordero notes.
“In terms of long-term retail opportunities, we’re seeing a lot of growth in places like the Denvers and Austins of the world,” she adds.
Here are eight attractive markets for retail real estate investment that experts suggest are worth keeping on your radar in 2020. These choices are based on a variety of variables, including investment sales velocity and investor demand, forecasted employment growth, retail vacancy levels, rent growth, new construction pipelines and population growth.