The effects of the pandemic have reverberated around the world across all economic sectors. The full extent of its influence will not be fully calculated, analyzed, and understood until after the storm passes. Retail real estate has been one of the hardest hit markets by virtue of the fact that people conglomerate at retail stores, restaurants, and shopping centers in general.
Despite the initial impact of COVID-19, retail real estate has shown resilience, it evolves, and it will continue to adapt to the changing habits of consumers.
We’ve reached out to several retail experts nationwide to provide their insights on the current state of the market. More specifically, we are interested in seeing where professionals see retail real estate valuations and retail developments going in the near (and semi-distant) future.
Retail Real Estate Expert Insights: Retail Valuations and Developments Post-COVID-19
What impact do you see on property valuations and new developments for the retail sector over the next 12-24 months?
Retail markets across the state are seeing expected declines in occupancy. However, it could have been much worse had retail not evolved over the past few years. Physical and digital innovations, including technology improvements, SEO-enhanced websites, digital marketing, and targeted social media outreach have been crucial to surviving this challenging time. Social distancing has forced most shopping decisions to be made on personal devices. Having retail development more in line with demand has helped get tenants through the pandemic and on to the other side. As a result, the impact on property values will not be as significant as it would have been had these changes not been made.
– Najdi Rafaty, CEO @ Linc Commercial Realty
Over the next 12 to 18 months, as retail bankruptcies accelerate due to both Covid-19 and overall industry headwinds as a result of the accelerated shift to online , vacancies will rise and rents will drop as new to market tenants will have a large inventory of space to choose from. As a direct result of the higher vacancies and subsequently lower rents, new developments will stagnate and property values will fall.
– Marcos Puente, Director of Acquisitions @ MMG Equity Partners
With the current uncertainty of Covid 19, and how long it will impact consumer shopping patterns, values are being impacted by the tenant’s ability to weather (and strive) in a long term Covid storm. Retail property with Grocery stores, drug stores, fast food with drive thru, and food with a strong take out business have been and will continue to be the winners. Outside of that, the waters are choppy. Retail development is primarily tenant driven, and Covid 19 has made drive thru’s that much more valuable. We will continue to see new single tenant development of drive thru pads for Tenants like Chick Fil A, & Raising Caine’s to name a couple.
– Rob Devericks, Vice President @ Radius Group
The net leased retail market will continue to bifurcate over the next 12-24 months. We expect cap rates to compress on investment grade net leased opportunities in which the tenant has a long term absolute net lease in place. This is primarily due to the overall risk aversion of clients and the low relative yield on competing investment vehicles. Conversely short term net leased deals or investments in sectors such as gyms, teir-2 fast casual restaurants, or movie theatres may see cap rate expansion and decreased trade velocity. Overall supply is expected to decrease as tenants limit their development pipeline and assets with less favorable pricing treatment are held back from the market.
– Karly Iacono, First Vice President Investments @ Marcus & Millichap
Over the next 12-24 months, we expect retail development to continue to slow, with vacancy increasing as a result of closings due to the pandemic and bankruptcy, both in the box sectors and smaller inline tenants. We are seeing rental rates decreasing, and we expect fewer new developments as a result. Due to vacancy, there will be premium infill space available, and we expect new development will not be able to compete on rates. The exception is Single Tenant Net Lease deals, primarily with a drive-thru. These spaces are being built and are selling at low cap rates. The Single Tenant Net Lease and core grocery anchored properties are highly sought after and may rise in value as investors compete for these assets. Overall though, we will see a short-term decrease in retail sector values. However, we are seeing expansions by tenants that have been less impacted by the pandemic. In the box sector, Dick’s Sporting Goods, Target, Burlington and Aldi are actively taking advantage of vacant boxes. On the smaller size, Dollar General has launched two new concepts. Popshelf, aimed at wealthier shoppers in suburban areas, and DGX, an urban convenience grocer, and both are expanding in 2021. Finally, the smaller food/service tenants have outperformed other segments during this period, and many are launching new prototypes that do not include indoor dining. P.F. Chang’s To Go is planning 12 additional locations for high density metropolitan areas. We believe this trend will continue for the next 24 months.
– Ronna McAuley, Director @ Crow Holdings Capital
It largely depends on the type of retail asset. Single-tenant, credit properties will continue to see stable valuations and more new development over the next couple of years, due to their tax benefits, inflation protection, attractive yields, and small transaction sizes. Valuations for grocery-anchored retail centers and shadow-anchored grocery centers will also likely remain stable. On the other side of the coin, there has been almost a full stop on lending for development of new retail centers due to the survival risk of restaurants, retailers and especially entertainment operators such as theatres, bars and bowling alleys due to the pandemic. For stabilized retail centers, it is hard to gauge the true impact to value because nothing is trading. Sellers are not willing to sell properties at distressed prices, and lenders and investors are not forcing them to sell, so the market is stagnant until we see the full effect of the pandemic, the unemployment and the election on consumer spending.
– Brenna Wadleigh, CEO @ N3 Real Estate