The pandemic is hitting multi-tenant retail properties incredibly hard.
In the third quarter, vacancy at multi-tenant properties increased 40 basis points to 6.4%, according to a Marcus & Millichap special report.
Not surprisingly, malls and neighborhood centers pulled down the performance of multi-tenant properties—both experienced increases of more than 100 basis points since the beginning of the year. Neighborhood centers with grocery anchors performed better than those without one. Still, some smaller retailers in those centers have been forced to close during the pandemic.
Marcus & Millichap expects lifestyle centers to rebound in a post-pandemic world as smaller retailers replace permanently closed restaurants. Essential businesses have helped power centers benefit, but some of those traffic gains could be surrendered after the pandemic when shoppers are offered more options.
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While there is trouble ahead for multi-tenant locations, single-tenant retail should outperform, according to Marcus & Millichap. Vacancies in single-tenant properties increased by 20 basis points to 5.2% in the third quarter, while rents softened.
Single-tenant strength is driven by essential services, such as quick-service restaurants with a drive-thru lane, drugstores and other essential retailers. Throughout the pandemic, investors have flocked to quick-service restaurants, dollar stores and pharmacies, according to the NNN Market Intelligence Report from Chris Pappas, associate director with Marcus & Millichap’s net lease division.
In an earlier interview with GlobeSt.com Pappas stated, “Interest is really concentrated in the dollar stores, drug stores and fast-food restaurants, which still have the drive-throughs that people were able to purchase food from.”
When big-box retailers have been allowed to continue to operate through the downturn, they are also reporting strong sales, according to Marcus & Millichap.
Even with those sales, some investors and developers are looking to warehouse conversions as a way to take advantage of the higher returns and strong rental growth of the logistics sector, according to Stuart Taylor, senior director of retail investments for JLL, in a post on the company’s website.
“Prime large-format retail sites will continue to be in high demand from retailers, but as long as logistics trends continue on their current trajectory, there will be pressure to convert sites where there is underutilized land, a secondary tenant mix or where the site is competing with a similar asset in the same area,” Taylor says.