Exchange Buyers Are Leaning Into Retail

The retail asset class has experienced its own odd polarity. On one hand, retail is struggling to survive in a world dominated by ecommerce, and on the other, it is thriving in well-located markets with high-quality product. Last year, 1031 exchange buyers in particular leaned into retail as a low-management investment class, and many of these buyers exchanged out of multifamily. Newmark Knight Frank recently sold a four-property retail portfolio for $35 million, focusing specifically on exchange buyers for the deal.

“We definitely saw an uptick of trade buyers in 2018 pursuing retail opportunities. There’s always a steady stream of trade buyers in retail but with the choppiness of the market and tenant bankruptcies, we definitely saw demand fluctuate, pricing soften a bit, and buyers easily spooked during due diligence,” Kyle R. Miller, executive managing director at NKF Capital Markets West, tells GlobeSt.com. “In 2018 we saw increased activity coming from the multifamily market sector into retail.”

The retail portfolio included a Petco in Northridge and a Petco, Office Depot, and multi-tenant property all located in the South Bay. Miller and his team, which included vice chairman Bill Bauman and senior managing director Dan Samulski, advised the seller to sell the properties individually to achieve the highest value. Miller says that they targeted exchange buyers specifically because of the “deal size, passive nature of the opportunities, and location are all characteristics that exchange buyers have been gravitating towards in this market.” The portfolio included three single-tenant buildings and a multi-tenant building.

All of the buyers on this deal exchanged from multifamily assets. “In the case of the multi-tenant strip mall in the portfolio, the investor sold a coastal single family residence they were using for investment,” explains Miller. “However, traditional retail investors are exchanging and staying in retail given their level of comfort and understanding of the product type.”

Particularly interesting is the range of retail assets of interest to this buyer pool. These investors are pursuing freestanding, drive-thru and national tenants products, according to Miller. “The drug store NNN market has slowed down due to uncertainty of certain companies and locations and whether or not outside influences such as Amazon and Walmart can disrupt brick and mortar drug stores,” he adds. “Overall though, well-positioned grocery-anchored retail in primary markets is still in highest demand in the retail space and commanding favorable pricing from both 1031 and traditional investors.”

While there is certainly a ominous narrative about retail investment, this trend shows that there are still plenty of opportunities and upside in the retail market. “Investors still believe in retail and enjoy the passive nature and ease of management it provides relative to office and multifamily,” says Miller. “Retail is far from dead. It’s simply transforming. Historically we have seen tremendous expansion and consolidation in the retail space. This year is no different. Retail is very much alive, and those that are creative and accept the changing environment will be just fine.”