Why Buy/Sell Markets Don’t Overlap for Retail and Multifamily

The retail and multifamily asset classes are following opposing supply-and-demand trends. As a result, the buy and sell markets for the two don’t overlap, and sometimes are even in opposition. According to a retail and multifamily report from Ten-X Commercial, the top retail buy markets are Austin, San Francisco, Orlando, Dallas and Houston, whereas in multifamily the top buy markets are Houston, Las Vegas, Raleigh-Durham, Atlanta and Salt Lake City. On the sell side, Milwaukee, Pittsburg, Oakland, Cleveland and Northern New Jersey make the list for retail markets and San Jose, Oakland, Miami, San Francisco and Milwaukee make the list for apartments. These markets are driven by very different fundamentals.

“When you have this situation where you are under competitive assault from e-retail, it helps to have a growing economy,” Peter Muoio, chief economist at Ten-X, tells GlobeSt.com. “It really is a situation where you have weak demographics and weak economies in the sell markets compared to those that are in the Southeast and the Southwest.”

The real story behind these differences, however, is supply-demand dynamics. Multifamily has seen strong demand, and then rising construction as a result. Retail on the other hand, has seen just the opposite. “The supply makes a big difference, especially compared to multifamily,” says Muoio. “A fundamental fact with retail is that we are not building any new retail, which makes sense because we don’t really need it. We are actually shrinking per of square foot per person for retail because of changes in the way people are spending. When you look at the multifamily report, the markets that were sell markets were on that list because there was an onslaught of new supply, making them vulnerable to any kind of downturn in the future.”

The excess of supply isn’t happening in retail. Instead, the markets are seeing an excess of supply with low or slowing demand. “That supply part of the equation isn’t coming into play in the retail markets when we are looking at the top markets and the bottom markets versus in apartments, where the supply factor is a key issue in differentiating the markets most at risk and least at risk,” says Muoio.

While retail overall is struggling, some investors are finding opportunity in specific markets with economic growth. Apartments, however, are suffering in major metros from the increase in supply. “Apartments had really strong demand that led to new supply, and therefore has some late cycle issues,” says Muoio. “Retail, on the other hand, has had weak demand and weak supply, so it is really a matter of this erosion of fundamentals. We are only 100 basis points below the peak vacancy rate since the recession after the longest expansion in history. That is really because there hasn’t been demand.”