Don’t Count Out Retail Investment in 2019

The retail market has certainly undergone a dramatic change this cycle—but investors and owners seem to have figured the modern retail market out, focusing on restaurants and entertainment, daily needs and discount stores to drive foot traffic and, as a result, sales. While the market adjusted, retail pricing has dramatically fallen in the interim, and now, savvy investors are finding strong returns in product that is undervalued.

“Retail had a significant shift in investor sentiment over the past two years. That is one of the single recurring discussions that we are having,” Bill Fishel, senior managing director at HFF, tells GlobeSt.com. “Investors are trying to figure out what types of retail is really going to work, and they are creating dedicated funds and new program ventures to chase those opportunities. There are going to be areas of opportunity within retail where we think that people are going to make a lot of money, while certain assets are not going to recover and will need to be repositioned into other product types.”

The combination of retail market expertise and low retail pricing has created the potential for strong returns. “There is retail that is materially discounted that, in our view, really shouldn’t be. When you can buy a secondary market convenience center with tenants in the discount space north of an 8% cap and very efficiently finance them, you can very quickly effectuate a double-digit cash-on-cash yield,”

In addition to the discount space, Fishel believes entertainment concepts and restaurants are the key to future growth in retail. “The pressure on retail has forced people to focus on economize and make a very compelling argument as to what is going to work. I think the things that are going to work are experiences. That is restaurants and new entertainment concepts, like movie theaters,” he says. “The retail center then becomes a holistic experience. We think that is a trend that is going to continue, and the people who are able to adeptly build that space will benefit.”

Investors aren’t the only group that sees potential in retail Debt capital sources have remained interested in the right retail deals. Fishel describes in-demand retail as a property with a dynamic tenant mix, quality location, experience sponsorship and an experience. “There is a lot of interest for properties that check the right boxes,” he says. “While sales pricing has unequivocally reset, there is sustained demand on the debt capital markets side. For the right assets, without troubled retailers or credits that are in peril, you are able to very efficiently finance these assets.”