Retail Is Outperforming, But Where Are The Investors?

Retail is quietly outperforming expectations, with core retail sales setting a new record in March—but investors continue to eschew the sector in favor of other, more sure bets. 

Marcus & Millichap data reveals that last month, total consumers spent $468 billion, up 6% from last year and 24% from pre-pandemic numbers. Inflation adjusted core retail sales were 1.1% from last year and a gain of 15.6% over pre-COVID numbers, and the National Retail Federation is predicting retail sales will increase by 6% to 8% this year.

“That’s really healthy growth, and it’s broad-based, including gains in about every retail subsector from building materials to apparel to restaurants,” says John Chang, senior vice president and director of research services at the firm. “When I talk to investors most are shying away from the retail sector, and for that I blame the press. It seems like they’re always down on retail, highlighting how the sector will be crushed by e-commerce in some fantastic retail apocalypse…there’s always some churn in the retail sector, but overall the retail industry continues to reinvent itself and perform.”

The retail sector is also creating jobs: retail trade employment is above pre-COVID levels, with 278,000 more people working in the sector today than before.  Retail vacancy rates continue to decline and now stand at just 40 basis points higher than pre-COVID levels, while average asking rents at average retail centers are 5.5% higher than prior to the health crisis.  Foot traffic is also up: about 5.4 million people visited retail properties in March, 6% higher than in March 2020 just prior to lockdown.

NRF President and CEO Mattew Shay predicts retail sales should hit $4.86 trillion or more this year.

“We should see durable growth this year given consumer confidence to continue this expansion, notwithstanding risks related to inflation, COVID-19 and geopolitical threats,” he said in prepared remarks in March.

But investors still appear to be spooked: in Marcus & Millichap’s recent investor survey, just 20% of respondents thought it was a good time to buy retail properties, slightly up from the 19% who say it’s a good time to buy office.

“While multi-tenant retail properties are outperforming expectations, the investment activity is still constrained,” Chang says, noting that while the total number of commercial real estate transactions were 31% higher in 2021 over 2019, the total number of multi-tenant retail transactions was only up by 18%. Retail also hasn’t seen the same level of cap rate compression as more actively pursued properties like apartments: multi-tenant retail cap rates are currently averaging around 6.8%, while multifamily clocks in at around 4.8%.

And “that’s an opportunity,” Chang says. “While many investors steer clear of retail investments because the media coverage of the sector has been negative, others are capitalizing on this to capture returns.”

Chang acknowledges that a significant roster of retailers did indeed close their doors permanently during the pandemic, but says “most of the victims were pretty much on the ropes” anyway.  Many were overleveraged (think Toys-R-Us), beaten by the competition (think K-Mart), or failed to adapt their business models (like Sears).

“Those are management problems, not intrinsic retail sector problems,” Chang says.