Retail Assets Will Face Pricing Challenges For At Least a Year
Retail Assets Will Face Pricing Challenges For At Least a Year
CRE industry watchers are increasingly observing signs of renewed life for retail—but pricing challenges may loom large in the short term as the sector recalibrates.
“Due to e-commerce competition and changing consumer preferences, retail-property assets have faced increasing stress long before the COVID-19 pandemic arrived,” Moody’s Analytics’ Ermengarde Jabir writes in an analysis originally published in Scotsman Guide. “But while many thought that the onset of pandemic-related restrictions would mark a true beginning of the end for brick-and-mortar retail, this simply has not been the case.”
At the dawn of the pandemic, e-commerce as a share of US retail sales shot up from 11.4% to 15.7%, a historic high between the first two quarters of 2020. But since then, the metric has declined, hitting 12.9% in the fourth quarter of last year. In other words, “in an apparent reversion to their original growth path, e-commerce sales (while still growing) indicate a continued consumer desire to make in-person purchases,” according to Jabir.
Marcus & Millichap data shows that consumers spent $468 billion in March, up 6% from last year and 24% from pre-pandemic numbers. The National Retail Federation is also predicting retail sales will increase by 6% to 8% 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,” NRF President and CEO Mattew Shay said in prepared remarks in March, adding that retail sales could hit $4.68 trillion this year.
Investors still appear to be spooked, and perhaps with good reason: the share of retail-backed loans that are at least 60 days overdue have also declined from a peak of 12.6% in July 2020 to 8.2% in February 2022, according to Moody’s. But Jabir is quick to note that retail still has some of the highest rates of past-due loans in recent years. Regional mall properties are the most at-risk retail subtype and contribute most to overall delinquency rates in the sector, with the share of mall debt that is delinquent standing at 17.7% in February, down from a 25.5% peak in November 2020.
Retail debt lost $1.1 billion in 2021 following the liquidation of 131 retail loans, according to Moody’s, a figure that comprised 48.8% of all commercial mortgage losses. Again, regional malls led those losses, but many were already in dire straits even before COVID-19.
Despite those figures, “performance metrics indicate improving prospects for retail, however slight,” Jabir writes, noting that Moody’s data shows that the vacancy rate peaked in 2020 at 10.5%, with negative net absorption totaling nearly 3 million square feet. “Retail began to slowly recover in 2021 with vacancies declining by 20 basis points. Renewed demand that outpaces completions is a trend that is expected to continue for the next five years.”
Jabir expects fundamentals to stabilize in the next few years as the sector “recalibrates toward a new equilibrium.”
“Although fundamentals and capital-market performance provide a glimmer of hope that the sector may be on the mend, retail will continue to face pricing challenges during the next 12 months as a multitude of factors continue to influence demand for these spaces,” Jabir says.
In Marcus & Millichap’s recent investor survey, just 20% of respondents thought it was a good time to buy retail properties.
“While multi-tenant retail properties are outperforming expectations, the investment activity is still constrained,” said Marcus & Millichap’s John Chang. 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%, he said. Retail also hasn’t seen the same level of cap rate compression as asset classes 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,” according to Chang. “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.”
By: Lynn Pollack
GlobeStreet Article