The retail real estate market might be a tricky one to navigate today. But that doesn’t mean that investors aren’t still looking to sink their dollars into this asset class.
That’s the takeaway from the May 2018 Retail Investor Sentiment Report from Real Capital Markets.
Big-box vacancies and high-profile store closings continue to be a problem for the retail sector, according to the report. But investors told Real Capital Markets that they are optimistic about other retail segments.
As the report says, retailers who embrace new models of reaching consumers – usually by focusing both on brick-and-mortar locations and building a robust online storefront – will put themselves in the best position to succeed in today’s market.
“Retail may be the most diverse and bifurcated of all commercial real estate asset classes,” said Steve Shanahan, executive managing director with Real Capital Markets. “Certain subsets of retail perform well, are in great demand and push the market in terms of price and value. Others have issues and are part of what is leading investors to consider other options, such as exploring other asset types.”
This is evident by the fact that 59 percent of the investors surveyed by Real Capital Markets say they are considering investing their dollars into property types other than retail. Most of them point to multifamily and industrial assets as their top options.
When investing in retail assets, though, survey respondents said they prefer anchored shopping centers, especially those anchored by grocery stores. Nearly half of investors – 48 percent – said anchored centers are the most attractive retail investment today. Just 23 percent said that strip centers were the most attractive.
The biggest threat to the retail segment? According to 39 percent of respondents, big-box vacancies topped the list. In 2017, investors viewed this as the third-biggest threat to the segment, ranking behind consumers’ changing buying habits and e-commerce.
What can retailers do to survive today? Investors told Real Capital Markets that retailers need to create experiences for consumers, something that will inspire them to leave their computers and head to a physical store.
“No one can buy an ice cream cone, get their laundry, put gas in their car or check out a liquor store on Amazon,” said Joe Cosenza, vice chairman with Inland Real Estate in Oak Brook, Illinois. “These are the kinds of tenants that tag along with all good grocery stores.”
Investors said that property owners who focus on service-oriented, Internet-resistant tenants such as medical and shared office concepts will put themselves in the best position to succeed. Those that create community gathering spaces or who replace portions of their retail space with other uses, such as multifamily, will also boost their odds of success in today’s market.
Cosenza said that some owners might need to think creatively and consider reducing the amount of retail to drive growth. A well-located, 125,000-square-foot center, with a 45,000-square-foot grocery store, might perform better with less retail and some added apartments, he said.
“Challenging times require creative measures to produce valued and desired outcomes,” said Tina Lichens, chief operating officer of Real Capital Markets. “We’re seeing some of that creativity as retailers reinvent themselves in the face of the challenges brought to light by e-commerce and other shifting consumer buying patterns.”
