Retail investment activity to expand in the second half

Retail investment activity to expand in the second half as tailwinds strengthen

National retail transactions faced challenges in the first half of the year driven by the combination of high debt costs and uncertainty surrounding monetary policy. Preliminary data suggests that retail transaction volume in the first half of 2024 was 36% lower compared to both the previous year and 2019, amounting to $16 billion, including single-assets and portfolios. The decline in transaction activity can be attributed to the Federal Reserve's implementation of a hawkish monetary policy, characterized by raising interest rates above 5% in 2023. This decision was driven by persistently high inflation, which further contributed to the slowdown in transaction activity since 2023.

However, there is growing confidence that the capital markets dislocation affecting retail transactions will stabilize in the second half of the year, leading to an uptick in investment activity. This heightened sentiment is rooted in recent developments such as the Federal Reserve signaling a potential rate cut in September, driven by lower-than-expected inflation in June. Additionally, there is a substantial amount of available capital for investment, with several funds closing this year, including Sterling’s notable fundraising of $600 million targeting grocery-anchored shopping centers and power centers in major markets. Furthermore, there is an impending surge in retail loan maturities, with over $70 billion reaching their maturity date in 2024 alone, which presents another catalyst for investment. Lastly, the higher cost of construction compared to the cost of acquiring retail properties creates an incentive for short-term investments, as the current discount to replacement cost remains favorable. Resultantly, we anticipate institutional capital and REITs to rotate back into retail to prioritize acquisitions in the latter part of the year. With bidder activity already ramping up significantly on a per deal basis with more deals launching, expect these tailwinds to boost retail investment in H2 2024.

Retail’s growth in larger transactions to be sustained by increased CMBS/SASB activity

Heightened investor sentiment is further demonstrated by the notable rise in larger national retail transactions. In the first half of the year, the average deal size for single-asset and multi-tenant retail transactions increased by 12% compared to the previous year, reaching $16.2 million. This marks the highest average deal size for single-asset retail in the past eight years. The notable transactions that contributed to the higher average deal price include the sale of the urban high street 717 Fifth asset for $963 million and the Fair Oaks Mall for $265 million. These deals resulted in an almost a two-fold increase in the volume of transactions with deal sizes of $250 million and above compared to the previous year. The resurgence of activity in CMBS and SASB markets, with a notable increase of 180% year-over-year, is expected to underpin the continued momentum of larger transactions in the latter part of the year.