Retail investors in 2025 face shifting market conditions, including tariff concerns, interest rate volatility, higher construction costs, and increased institutional competition. According to Michael Fitzgerald, executive director and head of US retail investments at W. P. Carey, these forces will continue to influence retail investments in the months ahead.
“You have many factors pushing cap rates in different directions, with new entrants and fresh capital coming into the market,” says Fitzgerald. “That increased demand naturally drives rates down. But at the same time, rising 10-year interest rates and investors trying to protect their spread are pushing cap rates up. In the end, we’ve actually seen some stability since this time last year.”
Still, in the current conditions, investors are reassessing how they evaluate risk, structure leases, and identify long-term value.
Pressure Points Grow
Rising construction and financing costs, as well as the increasing cost of imported goods, have become pressure points across the sector. According to Fitzgerald, those costs translate to higher rents, especially for new sale-leaseback deals. Even with those increases, Fitzgerald emphasizes that the need to ensure profitability still holds up at the store level. “We need to make sure the metrics still make sense,” he says.
Additionally, inflation has made flat leases a tough sell for investors. “It’s fair to say the age of flat leases is over,” adds Fitzgerald. “Outside of grocery, there’s really not much appetite for retail leases with flat escalations.”
Sale-Leaseback Opportunities Remain
Despite these headwinds, the retail sale-leaseback market has continued to see growth because the structure has basic advantages over other forms of financing. Sale-leasebacks offer long-term capital with no refinancing risk and typically without the restrictive debt covenants or balloon payments of traditional debt. As a result, companies that need capital and have a real estate footprint will continue to tap this form of financing despite overall higher cap rates.
According to Fitzgerald, the best candidates for sale-leasebacks are growing retailers in healthy retail segments. This includes companies that provide discount non-discretionary products and services, convenience stores, service-based segments and fitness.
How Disciplined Investors Move Forward
When evaluating retail assets, Fitzgerald emphasizes the EBITDAR-to-rent ratio as a key metric. “It’s the single most important metric for understanding whether a retail location is a good long-term investment. Locations with a history of consistent profit will tend to stay open and can support a fair amount of rent.”
Beyond that, Fitzgerald highlights that W. P. Carey also looks at the rent relative to the market and the cost basis of the property relative to its construction cost or replacement cost.
The corporate credit profile also plays a major role. Fitzgerald emphasizes he often looks for companies with strong credit, market leadership, conservative capitalization, solid management, a proven track record of success, and a conservative approach to growth. “W. P. Carey has a strong history of smart credit underwriting, and in some cases, our deep understanding of credit allows us to pursue investment ideas others will not.”
Despite changing market conditions, Fitzgerald believes disciplined investors still have room to thrive. For instance, he points to W. P. Carey’s access to capital, as well as their overall balance sheet strength.
“We are differentiated by our large balance sheet that allows us to make all-cash offers at large scale without any financing contingencies. This enables us to consistently offer certainty of close, which is often the most important factor sellers point to when choosing a sale-leaseback partner.”
Visit W. P. Carey at ICSC Las Vegas, South Hall Upper Level booth 4438R.
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