Multi-Tenant Retail: Trends In a Shifting Sector

GlobeSt.com caught up with Margaret Caldwell, managing director and partner at Stan Johnson Co., to discuss current and emerging trends in the multi-tenant retail sector. Here are excerpts from that conversation.

What trends are you seeing across the multi-tenant retail sector today?

There are a few trends impacting the market right now. First, we’re continuing to hear from REITs that parcelization is a trend that’s here to stay. By offering shopping centers in a combination of pieces, including the anchor boxes, outparcels, small shop space, as well as listing it in its entirety, we’re able to drive better pricing and create more marketing momentum. We’re also seeing investors pursue older strip centers. Newer developments often have tenants at above-market rents, but older centers can allow landlords to grow rents as they experience tenant rollover. Additionally, because they are unanchored, landlords can backfill these strip centers more easily while offering fewer concessions. Finally, here in the Southeast, we’re seeing a large influx of relocations and capital from the Northeast. This trend isn’t new – people have been flocking to the South for a while. COVID-19 has accelerated the shift of populations and capital from dense, urban areas to the suburbs and to high-growth areas like the Southeast. This is a trend we’ll most likely continue to see, even in a post-pandemic environment.

How have buyers reacted to COVID-19? Has their strategy changed in this new environment?

It’s not a surprise that buyers are reevaluating their investment strategies. The shut-down of non-essential retailers earlier this year, with some markets anticipating a repeat of that in the upcoming winter months, has definitely taken its toll on multi-tenant retail. Power centers, with strong, essential anchor tenants are regularly being viewed as stable assets. Investors seeking opportunistic, levered returns with stability can find what they’re looking for in smaller power centers. Investors seeking even higher returns are also looking at some of the troubled anchors for redevelopment options. Primarily located in malls and larger lifestyle centers, these anchors have become prime multifamily redevelopment opportunities because of their lot size, desirable locations and ample parking. Lastly, we’ve also seen retail-focused institutional buyers shift their strategies, at least temporarily. They’ve moved away from multi-tenant shopping centers to pursue single-tenant net lease retail assets. Due to this reduction of institutional investor competition, we have actually seen increased opportunity for private buyers in the multi-tenant retail space.

Which retail center types are in the highest demand?

Grocery-anchored centers remain one of the hottest asset types in the multi-tenant retail space. Investors are showing strong demand for high-performing grocery anchor tenants in desirable locations, and we’ve seen cap rates for these centers decline this year due to very limited supply. Distressed assets are also in high demand, but again, supply is extremely limited with the exception of malls and larger lifestyle/community centers. Currently, there is more demand for unanchored strip centers with small shop space, as well as power centers with essential retailers.

What pricing trends will you be watching in 2021 and beyond for shopping centers?

If you’re a buyer, it is difficult to find good deals today. Supply is very limited, and when you look across the Southeast, everyone is talking about the same five to ten deals. Sellers are in the catbird seat right now, especially for top-tier, grocery-anchored centers. Owners of quality real estate don’t have to discount their pricing, and demand from buyers continues to push up the pricing – at least as far as the debt markets will allow. As we look to 2021 and beyond, I expect we’ll see a significant increase in retail transaction volume. More stable assets will sell due to low cap rates, and at the opposite end of the spectrum, we should see more opportunities to buy from banks and special servicers.