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Real Estate

Retail real estate is thriving

pharmacy retail real estate

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 could offer 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 services) 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 recovered 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.

Retailers are continuing with strategic store growth plans. Despite low availability, a dearth of new supply, rising rents and high construction costs, retailers are following their customers close to where they live and work in the suburbs.

With retail vacancy at a historic low of 3.9%, finding high-quality space has been a clear challenge for growing retailers. Strong demand for space has continued with leasing activity reaching 140.6 MSF through the first half of 2024.1

High demand meets slowing supply

Necessity retail is typically concentrated in local neighborhood 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 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.

We believe 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-andcollect facilities, allowing assets to form hybrid retail and logistics components driving growth. We believe that clickand-collect will remain a key strategy, and growth in this sector is expected to outperform pure channel sales.

Outlook

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.

 

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Endnotes

1 Data source: CoStar, Aug 2024 This material, along with any views and opinions expressed within, are presented for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as changing market, economic or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. There is no representation or warranty (express or implied) as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields and/or market returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward‑looking information or the historical performance information herein has been considered or stated in preparing this material. Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments. Any changes to assumptions that may have been made in preparing this material could have a material impact on any of the data and/or information presented herein by way of example.

Please note, it is not possible to invest directly in an index. For all other index definitions shown in this material please click on the glossary link at the bottom of this page.

Important information on risk

Past performance is no guarantee of future results. All investments carry a certain degree of risk, including the possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Certain products and services may not be available to all entities or persons. There is no guarantee that investment objectives will be achieved. See the applicable product literature for details.

As an asset class, real estate-related assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Real estate investments are subject to various risks, including but not limited to, fluctuations in property values, higher expenses or lower income than expected, changes in economic conditions, currency values, environmental problems and liability, the cost of and ability to obtain insurance, and risks related to leasing of properties.

This information does not constitute investment research, as defined under MiFID

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