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Retail investment reaches $27 billion through mid-year 2017
U.S. retail transaction volumes declined 18.7 percent in the first half of 2017, but despite activity slowing more than $27 billion of trades occurred, according to JLL’s mid-year 2017 Investment Outlook. JLL expects to see large, strategic deals close in the second half of the year as investors adopt a more focused investment approach. Overall, retail remains healthy with vacancy holding at 4.9 percent and rents rising by 5.0 percent.
“Retail investors are being more selective with their investment strategies given the current uncertainty in the sector being spurred on by dramatic headlines and analyst negativity,” says Naveen Jaggi, President of Retail Brokerage and Capital Markets, JLL. “The true level of e-commerce disruption is still a bit murky, so investors are waiting it out on the sidelines until a clearer picture emerges. In the interim, we still expect large, marquee deals to transact, while smaller low-return deals will continue to face challenges.”
The retail investment basics:
- Secondary market activity softens as investors gravitate to primary markets and $5.1 billion of transactions in the first-half of 2017. In recent years, we have seen investors tread lightly into new retail territory by opening their purview to less conventional secondary and tertiary markets, which contain significant amounts of available retail product. Now, REIT and institutional investors are sticking closer to what they know, returning to strong gateway markets to place capital with less risk. But private capital remains interested in secondary and tertiary markets, where transactions reached $2.1 and $1.9 billion, respectively.
- Private investors are driving liquidity in struggling retail markets, by snatching up malls and power centers that long-term institutional and REIT investors are putting on the market. REITs and institutional capital are right-sizing their retail holdings and focusing on core assets and aggressively acquiring other well-performing, strategically aligned assets.
- Risk aversion remains the norm in retail, even in grocery-anchored assets. There is currently a broad opposition to risk across all retail product types, which includes grocery-anchored shopping centers. Generally thought to be one of the more stable retail investments, the sector is now seeing a wide gap in pricing between A and B/C grocery-anchored product. The change in appetite for grocery-anchored assets is due to increased vacancy leading to a decline in transaction volumes. Well-located centers with top-performing grocery stores are still seeing aggressive pricing and cap rates between five and seven percent.
“Investors are likely going to streamline their portfolios this year, but retail is a cyclical business and disruption fears will diminish over time and appetite for risk is expected to normalize in the back-half of 2018,” concluded Jaggi.