Retail Investment to Gain Momentum After Sluggish Start to 2018

JLL largely attributed the drop in investment to caution and the perception that current retail returns are not commiserate with current valuations.
Chris Angelone, JLL
Chris Angelone, JLL

Despite a 46 percent drop in retail investment sales in the first few months of 2018, JLL retail executives are optimistic that investors will gain confidence in the sector’s fundamentals and finish the year with an uptick in transactions.

“In the second half of the year, leaning towards the fourth quarter, you will see some larger transactions in the space driven by private equity that sees value in the retail sector,” Chris Angelone, retail investment sales lead for JLL, told Commercial Property Executive.

JLL said just $12.8 billion in retail assets were sold between January and April, a 46 percent year-to-year decline. The firm largely attributed the drop to investor caution and the perception that current retail returns are not commiserate with current valuations.

Naveen Jaggi, JLL
Naveen Jaggi, JLL

“Many investors are either allocating their capital into other property types, to debt versus equity, or taking a temporary pause,” Naveen Jaggi, president of retail advisory services at JLL, said in a prepared statement. “We’re pragmatically optimistic of today’s market and are seeing investors begin to rebuild their confidence in the sector as the fundamentals strengthen. Vacancy is stabilized at under five percent nationwide and rents have reached pre-recession levels.”

JLL also pointed to steady leasing, with 13.4 million square feet absorbed through April. New supply, however, is limited, with only 14.2 million square feet delivered this year, mostly in general retail. Less than one-third of new construction occurred in the shopping center and mall space. Because investors were slow to close transactions at the start of 2018, JLL said there is a large amount of capital looking to be deployed into retail.

 “Sellers are under more pressure to sell, than buyers are to buy. There is tremendous opportunity unfolding to buy quality retail at a discount to historical values – at the asset level and in the public markets  – REITs are trading at 2008 levels,” Jaggi said.

Upcoming trends

Angelone said he expects REITs to continue to be sellers and not buyers this year. “I think that a majority of the pure-play retail REITs, especially the open-air retail REITs, have continued to have disposition of assets they don’t see fitting their strategy profiles that they would like to sell,” he told CPE. “I think they’re going to continue to sell those assets in an orderly fashion. I don’t think the REITs are net buyers in the near term.”

Angelone, who noted he was speaking about open-air venues including grocery-anchored, lifestyle and power centers, not malls, said that most of the transaction activity seen in the first half of the year has been one-off sales of properties to private capital buyers. For the rest of the year, though, he predicted the primary players are going to be private equity and some institutional investors that have a core-plus, value-add strategy.

“There isn’t a definitive jumping-in point for transaction volume to accelerate, but as we head into the back-half of 2018, we expect transaction activity to pick up due to market capitulation and investor confidence finding solid footing,” Angelone said in prepared remarks. “There is more capital than product, which is unfolding a tremendous opportunity to buy at a discount to recent valuations.”

Angelone and Jaggi were among the JLL retail executives at this week’s International Council of Shopping Centers’ annual RECon event in Las Vegas. They said they saw optimism among the attendees for a sector that’s been hit with negative headlines in recent years due to bankruptcies and store closings. “We are optimistic and confident that it’s going to pick up,” Angelone said.

That was also the attitude expressed by others at RECon who were eager to talk about deals, redevelopment, technology and the growing overlap of brick-and-mortar, according to a CPE report from the convention. In particular, many pointed to multimillion-dollar renovations and makeovers taking place at shopping centers around the United States and the growth of experiential additions, such as more children’s offerings and restaurants.

Images courtesy of JLL