Sales of large retail properties plummeted 60.6% in 2020 as the headwinds that have battered the sector in recent years picked up hurricane force amid the pandemic.
A mere $8 billion of shopping centers and malls worth at least $25 million changed hands last year, down from $20.3 billion in 2019. It was the fifth consecutive year of declining volume, with annual sales coming in at less than a quarter of their 2015 peak, according to Real Estate Alert’s Deal Database.
Every major brokerage saw a steep drop in business. Eastdil Secured retained its crown despite a dip in market share, and the rest of the top five finished in the same order as 2019: CBRE, JLL, Newmark and Cushman & Wakefield.
Unlike other sectors, sales of retail properties were down substantially in the second half compared with the first. Most market pros expect a slow start to 2021, but hope for a pickup later in the year as the outlook for recovery becomes clearer.
“We are going to find out more in the next couple of months about the fallout, which will be important,” said Glenn Rufrano, chief executive at Vereit. “I have faith the economy will get better this year, because of the vaccine and because of the government stimulus. But it won’t be until the latter part of the year, and transactions may be slow again this year. Maybe better than last year, but not near 2019.”
After years of e-commerce growth challenging brick-and-mortar-properties, lockdowns to curb the coronavirus delivered a severe shock to the sector, as nonessential retailers shuttered their doors. While some restrictions have been lifted, consumers are still cautious about indoor shopping, dining and entertainment. Property owners remain uncertain about which tenants can continue to pay rent and for how long. That makes it difficult to underwrite net operating income, and therefore to value properties.
“When there is a lack of clarity into revenue, it’s hard to have conviction on the buy-side,” said Danny Finkle, co-head of JLL’s retail capital-markets platform. “That certainly improved as the year went on and continues to improve, but was a major concern for a lot of retail investors through 2020.”
Owners of high-quality properties that proved resilient, meanwhile, were reluctant to put them on the block with buyers demanding steep discounts. “If you have a good property, you are not going to sell it cheap, you are not going to give it away,” said Vereit’s Rufrano.
Even when there was a will to transact, lenders were skittish about providing financing — a major reason larger trades dried up last year. There were just 16 sales worth at least $100 million, down from 35 in 2019 and 80 at the peak in 2015. The number of deals over $200 million dwindled to just three last year, from 13 in 2019.
“The debt and lending market is one of the biggest single obstacles to transactions, last year and this year,” said Melina Cordero, chief of U.S. retail sales at CBRE. “We believe progress and recovery is happening faster on the ground than the lending market recognizes. … The lenders need to see proof of recovery. And in so many cases, that is going to take vaccinations and people going back into stores.”
Early in the pandemic, some opportunistic investors expected retailers would go bust and take landlords down with them, leading to a wave of mortgage defaults and distressed listings. But market pros say that trend has yet to materialize.
“Loan maturities were limited in 2020 and will be relatively limited in 2021,” said Finkle at JLL. “Retail assets were more operating incomes may have been negatively impacted in the near term, properties are covering debt service and have the benefit of time to rebuild or grow NOI and value as the market rebounds.”
Scott Onufrey, an executive vice president at Peaceable Street Capital, a Philadelphia-based investment shop, noted that “most lenders don’t want to take the property back. They want to kick the can down the road, which is what they did during the [2008 financial crisis].”
He said that dynamic has opened opportunities for firms like his, which provides preferred equity. “We have our eyes and ears open for opportunities, given the stress in retail,” Onufrey said. “With lenders being a little more conservative, there may be more opportunities for deals with a preferred-equity structure.”
Even as social-distancing restrictions ease and consumers return to stores for some purchases, the trend toward online shopping is expected to continue taking a toll on retail properties.
Green Street, the parent of Real Estate Alert, said in a Jan. 21 report that net operating income declined at an “unprecedented rate” in 2020, and forecast a drop in rents in the coming year. “Fundamentals are expected to remain deeply challenged in ’21” the firm said. “Occupancy is poised for a sharp decline as many struggling retailers seem unlikely to stay in business much longer.”
In its 2021 outlook on the retail sector, CBRE said retailer bankruptcies in the first eight months of 2020 nearly exceeded those in all of 2010, following the financial crisis. The firm projects that U.S. store closures for both 2020 and 2021 will exceed the 2019 record of 9,800 reported by the International Council of Shopping Centers.
No sector has been hit harder than malls — already reeling from the rise of e-commerce. Malls were particularly vulnerable to the challenges of the pandemic, and less able than strip centers to employ strategies such as curbside pickup. Class-A mall values have fallen nearly 45% from the peak in 2016, according to a Jan. 25 Green Street report.
The investment-sales market for malls all but vanished last year, as owners of top-performing properties held on and buyers shunned lesser assets. Just $248.7 million worth of mall trades took place last year, down from $341.8 million in 2019 and representing just 3.1% of large retail property sales. By comparison, $9.8 billion of malls traded at the peak in 2015, accounting for 27.2% of the total.
One bright spot was essential retail, such as grocery stores and pharmacies, that remained open during lockdowns. The biggest portfolio trade of the year was a package of grocery-anchored centers, and two others in the top five were groups of Walgreens drugstores.
Properties that are net leased to a single well-performing retailer are most in favor with investors. “With single-tenant, you can gauge the credit and reliability of income,” said Rufrano at Phoenix-based Vereit, which targets such properties. “That is really different from a shopping center where you may have 10 to 15 tenants. … It is hard to understand enough about a lot of those mom-and-pop tenants to believe they can make it.”
Retail pros say that the sector inevitably will shrink — CBRE projects U.S. inventory will plunge 20% by 2025 — but the current disruption will leave the survivors stronger. They point to retailers that are mixing online orders with in-store sales, an “omni-channel” strategy increasingly used by the likes of Target and Walmart.
“On the backside of Covid, we will have been through the worst of the retail sector,” said Onufrey, of Peaceable Street. “You will see retail properties come back in favor. Retailers are getting smarter at how they distribute goods. The key for me is they still need the retail space, not just a distribution center off some highway where people can’t access the goods.”
In the brokerage race, Eastdil finished first for the second year in a row despite a 63.6% drop in volume. It closed $1.6 billion of sales for a 24.2% share of brokered trades. Its three closest competitors didn’t fall quite as hard, and all gained market share.
CBRE repeated as runner-up by closing $1.5 billion of sales for a 22.5% market share. JLL was a close third, with $1.4 billion and a 21.3% share. Fourth-place Newmark experienced the smallest drop in sales among the major brokerages. Its $1.1 billion of trades gave it a 17.1% market share, up from 9.8% the previous year — the biggest jump in the league table. Cushman remained in fifth with an 8% share, closing $534.9 million of sales, down 64%.
Broker rankings are based on property transactions that closed in 2020 and involved full or partial stakes valued at $25 million or more. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one transaction. Only brokers for sellers were given credit. Portfolio transactions were included if the overall price was at least $25 million.