Is there hope for the retail sector in 2021? The retail capital markets team in CBRE‘s Minneapolis office thinks so.
And part of this optimism stems from a big fourth quarter. The CBRE team of Matt Hazelton, Sean Doyle, AJ Prins and Cory Villaume closed 14 retail sales totaling $35 million in the fourth quarter of 2020 in the Minneapolis-St. Paul market. This could be seen as evidence that investors are again becoming interested in the retail sector.
Another reason for hope? The retail market in the Twin Cities started 2020 with solid activity. When the COVID-19 pandemic slows — hopefully late this spring or early summer — the hope is that the sector will return quickly to those normal levels of activity.
“We began 2020 with activity tracking at normal historical levels,” said Hazelton, in a written statement. “Once the pandemic took hold, capital was forced to sit on the sidelines while the market navigated the everchanging landscape. Now that we are starting to see a path forward, investors are starting to show confidence in the sector again.”
And what about those 14 retail sales that the CBRE team closed in the fourth quarter? These real estate pros said that they noticed some interesting trends, trends indicating that some retail property types will be more desirable in the near future.
Topping the list as most desirable are properties with tenants that are considered essential businesses and can continue to operate at a mostly normal level even if government restrictions and stay-at-home orders are enacted. The CBRE team’s fourth quarter retail sales included three auto parts stores. Auto-related businesses are considered essential and typically do well during recessions, making them especially attractive to investors.
Investors are also high on retail properties with drive-thrus. Having a drive-thru has always been a positive for retail properties, but this has now become a necessity for many investors. During the pandemic, customers have flocked to quick-service restaurants and their drive-thru lanes, after all. The CBRE retail team traded six properties with drive-thru components in the fourth quarter.
Then there is location. As always, well-located properties are desirable to investors. As an example, the CBRE team represented the buyer of Lincoln Commons in St. Paul, a Twin Cities investment group that was attracted to the deal because of its location and the long occupancy history of the existing tenants.
The CBRE retail team also pointed to the rise of net-lease investment sales as a trend in the Twin Cities. Single-tenant properties with strong credit were top performers before the COVID-19 pandemic and economic downturn and have remained attractive throughout these challenging times.
According to recent research from CBRE, net lease properties’ share of total commercial real estate investment volume across the nation has increased from the 11 percent to 13 percent range in 2012 to 18.4 percent in the third quarter of 2020.
Retail anchored by grocery stories and smaller multitenant centers with a large proportion of essential retailers are also attracting interest from investors, CBRE said.
“There is no doubt that the retail sector is facing serious headwinds,” Hazelton said. “But there are still opportunities for capital to invest in retail properties with strong fundamentals. This will help lead the way for more broad investment as we head toward recovery.”