Real Estate Alert: Retail Rankings – Eastdil Out Front

Sales of large retail properties sank 50% in the first half as the capital-markets disruptions that have affected activity among all property types finally caught up with the sector, halting its comeback.

Some $10.29 billion of retail properties worth at least $25 million traded through June, down from the record $20.59 billion that changed hands during the first six months of last year, according to Green Street’s Sales Comps Database. Eastdil Secured got out to an early lead in the brokerage race, followed by CBRE in second place and JLL, last year’s winner, in third.

Retail was the only property sector in which trading activity rose last year, but interest-rate hikes prompted a slowdown late in 2022 that worsened over the first
six months of this year. Market pros say sales should pick up in the second half — and activity increased more than 50% in the second quarter compared with the first. But many are skeptical that any major rebound will occur this year.

“The bid-ask spread was and remains very wide,” said William Gerrity, chief executive of Gerrity Group of Solana Beach, Calif., which owns retail properties in the Western U.S. “I think the market expects values to adapt to the cost of debt, but there remains uncertainty about where the debt markets will stabilize. And until that is clear, the spread will remain quite wide.”

Large deals, which are tough to finance when interest rates are high, took the biggest hit and dragged overall volume lower. Only three trades topping $200 million occurred in the first half, down from 11 during the same period last year.

“Interest rates and availability of debt are really big issues that hinder the larger transactions,” said Chris Decoufle, leader of CBRE’s retail capital-markets team. “That’s not going to change this year. What it means for next year is TBD.”

The retail sector had been in the middle of a remarkable turnaround. Investment sales volume tumbled five years in a row beginning in 2015 amid the rise of e-commerce and a raft of retailer bankruptcies. The public health restrictions put in place during the pandemic exacerbated those problems, but investor sentiment shifted last year as sector fundamentals bounced back after years of scant construction.

In a twist, the improving leasing market could be part of the reason transaction activity has fallen this year. According to a midyear Cushman & Wakefield report, the retail sector’s leasing market has strengthened over last year, “defying the gravitational pull of an uncertain economic outlook.” Occupancy has climbed 60 bp during the past 12 months to a record high of 94.6%, and asking rents average $23.47/sf, up 4.7% from a year ago — and 16% higher than in 2019.

That healthy backdrop is helping to dampen sales volume by making owners bullish about their properties’ performance and reluctant to sell at discounts in a choppy  market.

“Many owners are looking at their assets and feel like, for the first time in a long time, they have strong tailwinds from an operational standpoint, and want to take advantage of that,” said Danny Finkle, co-leader of JLL’s retail capital-markets program. “Owners are more interested in harvesting value and NOI growth from an operational stand point because there is minimal new development, occupancies are near all time highs, and a lot of retailers are still trying to push out expansion plans.”

Industry pros said the market was most active among deals of $50 million or less — especially those with core plus or value-added profiles that would allow buyers to take advantage of the strengthening leasing market by filling vacancies and raising rents.

“High-quality vacancy and near-term lease expirations are very much in favor from investors,” Finkle said. “But that is the unicorn and it is increasingly rare to find those opportunities.”

Strip-center values are down 14% from their peak early last year, compared with the 16% decline for all property types, according to an Aug. 4 report from Green Street, the parent of Real Estate Alert. Market pros say peak pricing was fueled by dirt-cheap debt and has since normalized.

“During the post-Covid flash cycle, pricing really spiked to … levels we had not seen before,” CBRE’s Decoufle said. “Retail pricing has [since] reverted to the mean based on the last 20 years. … The regions that didn’t get overheated in the flash cycle are now trading much better than the markets that got very hot during that period. The Southeast, Texas and the Midwest have smaller bid-ask gaps, while Florida has the most pronounced gap.”

The retail-property sales market is showing some signs of improvement. Transaction volume increased 54% in the second quarter over the first — the biggest gain of any property type. Retail’s relatively higher capitalization rates, compared with multifamily and industrial, meant more deals could pencil out amid high-interest rates.

“Retail has not been a negative-leverage game,” Decoufle said. “The cap rates were already higher than the other product types coming into this period. Consequently, the sector didn’t have to adjust as much to maintain volumes. These metrics are in our favor.”

Still, market pros think more clarity is needed about the Federal Reserve’s stance on interest rates before activity resumes in a significant way.

“Transactions will surge when buyers, sellers and lenders are confident in fair values,” Gerrity said. “I don’t think this will happen until early to mid-2024.”

In the brokerage race, Eastdil closed $1.86 billion of sales in the first half for a 28.8% share of brokered trades. That was propelled by a single deal: the $1.5 billion sale of a portfolio of convenience stores.

CBRE barely edged out JLL for the second-place slot by closing $1.32 billion of trades for a 20.4% market share. JLL, after taking the retail crown three years in a row, fell to third with $1.30 billion of sales for a 20.2% market share. Newmark ($690.5 million, 10.7% market share) and Cushman ($369.5 million, 5.7%) rounded out the top five.

There were $1.36 billion of mall sales worth at least $25 million in the first half, down from $1.75 billion in the same period last year. Malls accounted for 13.2% of total retail volume, up from 8.5% last year.

Broker rankings are based on property transactions that closed January through June 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 package price was at least $25 million.