Retail Capital Markets Posted Impressive Numbers in H1. Will It Continue?
Retail capital markets were buoyed by a substantial uptick in deal flow, led by activity on the West Coast.
Total retail transaction volume clocked in just shy of $45 billion in the first half of 2022, an 81% increase year-over-year, according to new research from JLL.
The West Coast was the most active market with $13.2 billion in total volume, a 124% uptick over 2021, followed by the Southeast at $11.2 billion and the Southwest at $6.4 billion. Returns varied by regions, with going-in yields the lowest on the West Coast (average cap rate of 5.72%) followed by the Southwest at 6.34% and the Midwest with the highest average cap rate of 7%.
JLL analysts note that grocery-anchored centers were in high demand last quarter with $3.8 billion in volume and cap rates that averaged at about 6.32% on an in-place basis. The property type was a favorite of institutional money in particular, with such groups acquiring some $600 million more than they sold.
Private capital was the most active participant in the second quarter, but its market share did decline by 7% year-over-year.
Impact of Rising Interest Rates
Rising interest rates is beginning to have an impact on retail investment activity, JLL analysts note in the report. It became evident in late Q2, “perhaps most evident in the depth of buyer pools, as the average number of bids per deal declined by 25% over the quarter. The rising market uncertainty and accompanying decline in lending activity from national lenders created an opportunity for regional and relationship lenders to step in at aggressive debt terms.”
Specifically, regional banks comprised 59% of all financing deals in Q2 and account for 49% of deals currently under application, JLL says.
“As money center banks weigh the impact of increased capital reserve requirements, regional and relationship lenders will continue to be the most reliable financing option through the end of the year, although, it’s unlikely that we will see large banks pull out of retail entirely,” they say. “We do expect the big banks to place a greater emphasis on quality operating partners and sponsor market expertise.”