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.
Endnotes
1 Data source: CoStar, Aug 2024
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