Retailers are reinventing themselves, adapting to a more technologically sophisticated shopper, and realizing it’s about the experience. | Pixabay.com

Retail Investors Are Expanding Into Alternative Asset Classes

Carrie Rossenfeld Retail

Retail investors are still in a buying mode, as they continue to focus on finding assets that can meet the changing needs of today’s consumers and produce desirable returns, according to Carlsbad, California–based Real Capital Markets’ (RCM’s) May 2018 Retail Investor Sentiment Report.

While big box vacancies and high-profile retail store closures continue to adversely affect parts of the industry, investors surveyed noted optimism in other retail segments. Retail owners who embrace new models — whether they are experiential or contain some variation of mixed use — are considered to be in the best position to succeed in today’s retail environment.

“Retail may be the most diverse and bifurcated of all commercial real estate asset classes,” says Steve Shanahan, executive managing director of RCM. “Certain subsets of retail perform well, are in great demand, and push the market in terms of price and value. Others have issues and are part of what is leading investors to consider other options, such as exploring other asset types.”

In May 2018, RCM surveyed its U.S. database of retail investors to gauge their sentiment on various investment related topics. Highlights of the report include:

The state of retail is most impactful — The overarching state of the retail market, on its own or in combination with economic factors, is having the greatest impact on retail property investing, according to 71 percent of survey participants.

Investors are expanding into alternative asset classes — Almost 70 percent of investors surveyed categorize themselves as net buyers, with only 11 percent taking a wait-and-see attitude. This contrasts with 2017, when 57 percent considered themselves net buyers, but nearly one third were holding out to get a better gauge of industry and economic conditions. Equally as important is the finding that 59 percent of investors are looking to consider other property types, most notably multifamily and industrial assets.

Anchored shopping centers remain the preferred retail investment — especially grocery-anchored centers, by a greater margin in 2018 than in 2017. Nearly half of investors, 48 percent, said anchored centers are the most attractive retail investment today compared to strip centers, which were characterized as the most attractive by 23 percent. While the grocery business faces challenges with online ordering and prepared-meal concepts, conventional wisdom says stores won’t be replaced, just refined.

Greatest threat is big-box vacancy — With new big-box bankruptcies and previously announced store closures taking place, investors’ views on the greatest threat to retail investing has changed. Big-box vacancy is now viewed as the greatest threat, cited by 39 percent of investors. In 2017, it was viewed as the third-greatest threat to retail investing, behind changing consumer buying habits and e-commerce.

Retailers and owners seek to deliver the experience consumers crave — Survey participants highlighted a variety of different strategies and tactics that retailers and property owners are taking to be more experiential while improving operations and creating greater value. Among those tactics are: creating community gathering places; focusing on service oriented, Internet-resistant tenants like medical and shared-office concepts; and evaluating options to combat over-retailed anchored centers by eliminating a portion of the retail space and replacing it with other uses, including a multifamily element.

“Challenging times require creative measures to produce valued and desired outcomes,” says Tina Lichens, COO of RCM. “We’re seeing some of that creativity as retailers reinvent themselves in the face of the challenges brought to light by e-commerce and other shifting consumer buying patterns.”

The call for core and value — Many buyers — private capital, entrepreneurs, foreign investors, and private equity investors — primarily are acting when a value component is present. The survey results echo that finding that value-add remains a popular strategy, with 52 percent seeking properties where they can create value. In retail, that means going beyond refurbishing a center to be able to raise rents. Generally, it means moving to more service-oriented tenant rosters. While there is pent up demand for core product, there is very little being brought to market. Accordingly, only 9 percent said they are looking for core-related product.

According to RCM, the business of retail — and the bricks-and-mortar that supports it — is not without its challenges. Yet not all retail is hurting. Retailers are reinventing themselves, adapting to a more technologically sophisticated shopper, and realizing it’s about the experience. Over time, these changes can be a positive force for all things retail, including investments made in bricks-and-mortar. In the meantime, according to experts in retail real estate investing, those properties that are performing well will continue to be in demand, producing solid returns for investors.