Retail transaction volumes were $12.8 billion in the first four months of 2018, according to JLL, reflecting a 46 percent decline in investment in retail assets during the first part of the year. JLL attributed the drop to investor caution and a perception retail returns are not commensurate with current valuations.
“Many investors are either allocating their capital into other property types, to debt versus equity, or taking a temporary pause,” said Naveen Jaggi, president of retail advisory services at JLL, in a statement. “We’re pragmatically optimistic of today’s market and are seeing investors begin to rebuild their confidence in the sector as fundamentals strengthen. Vacancy is stabilized at under 5 percent nationwide, and rents have reached pre-recession levels.”
Although fundamentals are improving, investors were slow to close transactions at the start of 2018, and there is a large amount of capital looking to be deployed into retail.
“Sellers are under more pressure to sell than buyers are to buy. There is tremendous opportunity unfolding to buy quality retail at a discount to historical values — at the asset level and in the public markets — REITs are trading at 2008 levels,” added Jaggi.
Given the limited amount of core product available, investors maintain a wide geographic purview for potential acquisitions, seeking growth opportunities. Aside from best-in-class assets, cap rates continue to soften, with the market less willing to compromise on pricing, and underperforming retail product continues to trade for high cap rates in secondary and tertiary markets.
“We’re dealing with a buyer pool that seems to be getting smaller and smaller with a pricing delta that’s widening, which is causing a notable pause in transactions getting over the finish line,” said Chris Angelone, retail investment sales lead at JLL. “But it’s not just the bid-ask spread that’s off-kilter; we’re seeing a lack of buyer conviction for decent, quality and stabilized assets nationally.”
JLL found some interest in opportunistic retail acquisitions, which hints institutional capital is actively looking for opportunities in the coming 12 months. Investment by REITs lagged in the first quarter, and REITs have been more active on the sell-side, looking to divest noncore assets. Although debt is available, interest rate increases are having an impact on retail asset valuations, causing a delay in transactions.
“There isn’t a definitive jumping-in point for transaction volume to accelerate, but as we head into the back-half of 2018 we expect transaction activity to pick up due to market capitulation and investor confidence finding solid footing. There is more capital than product, which is unfolding a tremendous opportunity to buy at a discount to recent valuations,” concluded Angelone.
Andrea Zander is editor of Institutional Real Estate Newsline.