Retail Investing Is Making Its Return—What It Means for CRE in 2024

Key Takeaways:

– Despite challenges in the commercial real estate space, retail has become popular among institutional investors.
– Retail has remained resilient and has seen an increase in demand, even during the pandemic.
– Consumer resilience and steady spending have contributed to the strength of the retail space.
– Luxury retail has also seen growth in the US.
– Suburban migration has driven demand for outdoor shopping centers.
– Analysts expect the retail real estate space to stay strong through 2024, particularly for outdoor retail centers.
– Construction costs have led to less new development, increasing prices and contributing to a low vacancy rate.
– The retail sector is appealing to investors due to the expected rate cuts by the Fed.
– Private equity firms and real estate investment trusts (REITs) have been acquiring retail properties.
– Despite the challenges in the commercial real estate market, there are opportunities for retail real estate investors.
– Demand for retail space is expected to continue, especially in suburban areas.

BiggerPockets:

Despite recent challenges in the commercial real estate space, one area has become surprisingly popular among institutional investors: retail.

As demand for office space has declined, retail seems to have picked up, despite a tumultuous 2023. According to the Wall Street Journal, private investors snagged $1 billion more in retail assets than they sold in the third quarter of last year.

Predictions for retail over the coming year are strong, with many expecting retail to be a bright spot in an otherwise lackluster CRE space. 

Why Has Retail Remained Resilient? 

Retail was a declining sector for many years, as enclosed malls shut down and many feared the rise of e-commerce would put an end to traditional shopping sprees. But retail has sprung back in the last few years since the pandemic. Despite being able to shop from the comfort of our couches, it seems shoppers still like to go to stores in person.

Even Bed Bath & Beyond and Rite Aid collapses were not enough to bring down retail. If anything, it helped free up prime real estate for retail companies. Landlords had no problem filling up the vacant stores, they told the Wall Street Journal.

Part of the reason the retail space is strong right now is due to consumer resilience. Despite declining activity during COVID-19 shutdowns and fears of a recession, consumer spending has been steady. Retail sales have surpassed pre-pandemic levels.

Luxury retail has also risen in the U.S. According to a report from PwC, tenant demand for luxury brands skyrocketed in the last 18 months. Many brands are looking to expand further into the U.S., brokers told the research and auditing firm, as Europe and the Middle East are saturated, and the Chinese economy is declining.

Another factor that has helped strengthen the retail space is the change in suburban migration. As hybrid and remote work have become the norm, more people are moving from urban areas to the suburbs. This, in turn, has driven demand for outdoor shopping centers such as community areas, strip malls, and grocery-anchored shopping centers. According to CoStar Group, these grocery-anchored centers account for 25% of retail inventory in the U.S. and have just a 6% vacancy rate, its lowest level in 20 years.

Will Retail Grow in 2024? 

Analysts expect the retail real estate space to stay strong through 2024, especially for outdoor retail centers. High construction costs have meant less new development, which is likely to increase prices as demand surges. This has also contributed to the low vacancy rate for retail over the past few years.

Real estate firm CBRE expects the retail availability rate to end the year at 4.6%. And while it expects rent prices to dip below 2% in the first three quarters, prices will likely rise above 2% by the end of the year, the firm said.

With the Fed expected to cut rates as much as five times this year, this will likely ease the cost of borrowing, making retail and other real estate more appealing to investors.

Private equity firms are taking note, reports the Wall Street Journal. Many have been buying up retail properties since 2020, especially open-air centers. “You can buy open-air retail today with an immediate return on your purchase price in excess of your cost of debt,” Temerity Strategic Partners CEO Bruce Cohen told the Wall Street Journal.

Real estate investment trusts (REITs) are also taking note of the strength of the retail sector, as M&A activity picked up last year. Kimco Realty closed its acquisition of open-air shopping center owner RPT Realty on Jan. 2, while retail owner Regency Centers acquired Urstadt Biddle Properties in August 2023.  

The Bottom Line 

While commercial real estate is still in trouble, there appear to be opportunities for real estate investors in retail. Demand for retail space is expected to continue through 2024, although consumer spending could falter if higher interest rates continue.

Still, even with an economic correction, a decline in construction activity over the past few years means there’s strong demand for retail space. And with more people moving to areas with more space, suburban shopping centers are likely to remain in demand.

More from BiggerPockets: 2024 State of Real Estate Investing Report

After more than a decade of clearly favorable investing conditions, market dynamics have shifted. Conditions for investment are now more nuanced, and more uncertain. Download the 2024 State of Real Estate Investing report written by Dave Meyer, to find out which strategies and tactics are best suited to win in 2024. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

Despite the challenges faced by the commercial real estate (CRE) sector in recent times, one area that has surprisingly gained popularity among institutional investors is retail. While demand for office space has declined, retail has experienced a resurgence, even amidst the tumultuous events of 2023. According to the Wall Street Journal, private investors acquired $1 billion more in retail assets than they sold in the third quarter of last year. Predictions for the retail sector in the coming year are optimistic, with many expecting it to be a bright spot in an otherwise lackluster CRE space.

The resilience of the retail sector can be attributed to several factors. For many years, retail was seen as a declining sector, with the closure of enclosed malls and the rise of e-commerce threatening traditional shopping experiences. However, in the last few years, retail has made a comeback, particularly since the pandemic. Despite the convenience of online shopping, it seems that consumers still enjoy the in-person shopping experience. Even the collapses of major retail chains like Bed Bath & Beyond and Rite Aid have not been enough to bring down the retail sector. If anything, it has freed up prime real estate for other retail companies. Landlords have had no trouble filling up vacant stores, as reported by the Wall Street Journal.

Consumer resilience has played a significant role in strengthening the retail space. Despite a decline in activity during COVID-19 shutdowns and concerns about a recession, consumer spending has remained steady. Retail sales have even surpassed pre-pandemic levels. Additionally, luxury retail has seen a rise in demand in the United States. According to a report from PwC, luxury brands have experienced a surge in tenant demand over the past 18 months. Many brands are looking to expand their presence in the U.S. market, as Europe, the Middle East, and the Chinese economy face challenges.

Another contributing factor to the strength of the retail sector is the shift in suburban migration. With hybrid and remote work becoming more prevalent, more people are moving from urban areas to the suburbs. This has driven the demand for outdoor shopping centers such as community areas, strip malls, and grocery-anchored shopping centers. According to CoStar Group, grocery-anchored centers make up 25% of retail inventory in the U.S. and currently have a vacancy rate of only 6%, the lowest in 20 years.

Analysts expect the retail real estate space to remain strong in 2024, particularly for outdoor retail centers. High construction costs have limited new development, leading to increased prices as demand surges. This has also contributed to the low vacancy rate in the retail sector over the past few years. Real estate firm CBRE predicts that the retail availability rate will end the year at 4.6%. While rent prices may experience a slight dip in the first three quarters, they are likely to rise above 2% by the end of the year. Additionally, the expected rate cuts by the Federal Reserve will lower borrowing costs, making retail and other real estate investments more appealing to investors.

Private equity firms have taken notice of the strength of the retail sector and have been acquiring retail properties, especially open-air centers, since 2020. Real estate investment trusts (REITs) have also recognized the potential in the retail sector, leading to increased merger and acquisition (M&A) activity. Kimco Realty recently closed its acquisition of open-air shopping center owner RPT Realty, while Regency Centers acquired Urstadt Biddle Properties in August 2023.

In conclusion, while the commercial real estate sector as a whole faces challenges, there are opportunities for real estate investors in the retail sector. The demand for retail space is expected to continue in 2024, although consumer spending may be affected if interest rates rise. Nevertheless, the decline in construction activity over the past few years has created a strong demand for retail space. With more people moving to areas with more space, suburban shopping centers are likely to remain in high demand.

Disclaimer: The opinions expressed in this article are solely those of the author and do not necessarily reflect the views of BiggerPockets.

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