Surprise! Retail real estate is going strong
Contrary to what many believe, the retail real estate sector may offer the resilience income and growth investors are seeking. Compared to the other major real estate sectors, retail currently offers higher yields and likely less competition for investor acquisitions.
Despite shifting consumer behaviors and the threat of a potential recession, necessity retail (grocery, discount and convenience stores) has performed particularly well. Even as consumers scale back on spending, they continue to purchase essential items. And hybrid working models mean shoppers are heading to their local retail centers.
U.S. retail recovers from the pandemic
Grocery-anchored retail is set up for solid performance, mainly because renewed retailer demand and lack of new construction have combined to produce historically low vacancy rates.
In 2022, retailers announced more store openings than closures for the first time since 2016. The U.S. saw 5,103 store openings by major retailers in 2022 versus 2,603 closures, with discount retailers leading openings.1
High demand meets slowing supply
Necessity retail is typically concentrated in local neighborhoods and community or strip centers. New supply has slowed in the past six years, with fewer new properties coming online compared to more discretionary retail centers. Meanwhile, lower vacancy rates in grocery-anchored retail have helped support rents, resulting in income for real estate investors.
European retail has proven resilient
Macroeconomic headwinds in Europe led to continued market correction in late 2022 and early 2023, with cap rates rapidly expanding across the real estate market. While the European retail sector has not gone unscathed, it proved remarkably more resilient against capital value loss versus its office and logistic counterparts. This is partially due to the retail market’s pricing reset. As property yields soften across all sectors, European retail continues to provide elevated income returns driving strong performance and gaining increased investor interest.
Grocery-anchored and convenience retail assets (namely retail parks) offer the strongest opportunities. From an occupier side, retail parks favor a diverse mix of occupiers less reliant on fashion, which continues to be impacted by online sales. Retail parks have greater compatibility with e-commerce through click-and-collect facilities, allowing assets to form hybrid retail and logistics components driving growth. We believe that click-and-collect will remain a key strategy, and growth in this sector is expected to outperform pure channel sales.
Global retail markets differ due to cultural nuances and local market drivers. However, the trends supporting necessity and convenience retail investments transcend continental divides.
Investors can take advantage of disruption in the capital markets, seek discounted asset opportunities and capitalize on the stable income returns that necessity retail can provide. Traffic at these retail assets has proven resilient and defensive against e-commerce trends, reinforcing our view that not all retail is created equal.
1 Data source: Coresight Research.
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