Share: Share on Facebook Share on Twitter Share on LinkedIn I recommend visiting to read:%0A%0A {0} %0A%0A {1}
retail Retail

Retail Resilience: A Good Time for Investors to Shop Local

James Bohnaker • 12/5/2023

Part 1: Consumers at the Helm | Part 2: Retailers Put to the Test 

The CRE retail sector has displayed remarkable resilience from both consumer and tenant perspectives. On the back of this resilience, investors have started to reevaluate and turn to retail as a viable investment option. Once viewed as a sector under systemic threat, retail is now recognized as one of CRE’s emblematic “underdog” success stories. Investors have taken notice of retail’s predictable, sustainable cash flows and remarkable adaptability. 

This resurgence in investor interest in retail has arguably been overshadowed by the coincident unfolding of an abruptly higher interest rate environment, which has brought uncertainty, debt market dislocation and a contraction in investment activity.  As this uncertainty fades, we believe that retail is poised to experience a robust rebound in capital markets activity, as pent-up investor demand for the sector is deployed, particularly in the open-air sector.  

Key Takeaways: 

  • Retail assets experienced cap rate compression during the pandemic but not to the same degree as other CRE assets, suggesting that their cap rates do not need to expand as much to reflect higher base rates. Buyer-seller price expectations are more likely to be aligned sooner than later, which will spur more fluid capital markets dynamics.
  • CRE investing is entering an income-focused era. From this standpoint, retail and suburban shopping centers look attractive relative to other sectors, which are faced with a confluence of cyclical and structural headwinds.
  • New retail construction is experiencing historical lows, and overbuilding is not a remote concern. Additionally, demolition of older retail product is driving healthy rental growth at a time when retail occupancy is at historical highs in many markets.
  • Private capital sources are likely to remain most active in the near term due to their investing structure, but institutional capital will revisit retail as a viable opportunity to rebalance portfolios as the debt and capital markets thaw.

This is the final part of a three-part series that explores the remarkable resilience of the retail sector and sheds light on its continued growth in an ever-evolving landscape. In this article, we set the foundation for what we believe will be a renewed and robust investment cycle for retail. 

Retail Looks Relatively Attractive on Pricing

The ultra-low interest rate environment that persisted during the pandemic spawned a massive injection of capital into property markets. The CRE sector broadly experienced a 23.5% increase in sales from 2020-2022 compared to the prior three years. Meanwhile, retail investment sales registered a 0.8% decline over that period, as a lack of regional mall activity weighed on sector totals; open-air retail experienced robust years of individual transactions as well as healthy M&A activity.  

The retail sector’s lagging performance relative to other property types is likely to be a tailwind going forward. Other asset classes saw a larger spike in price appreciation, disincentivizing owners who purchased in that environment from selling in today’s market, which is characterized by sizable price adjustments and relatively healthy cash flows. Meanwhile, potential buyers are faced with the prospect of underwriting purchases with negative leverage—meaning debt costs are higher than the going-in yields. In this situation, a property needs to demonstrate the potential to generate additional income from its future earnings to achieve positive returns over time. Purchasing an asset with negative going-in leverage, especially in the current environment where income growth across most CRE types is entering a more subdued phase, is a risky strategy. The lack of seller urgency and challenges in buyer underwriting has led to a disconnect between buyer and seller expectations and a sluggish transaction market.  

This dichotomy is not as acute for the retail sector. From 2019 to mid-2022, retail prices per square foot rose just 9.6%, compared to the staggering increases of 40%-50% in the apartment and industrial sectors. While counterintuitive, the relative benefit of less price appreciation is now coming to bear, as retail’s recent price adjustments have been relatively muted. In the past four quarters, capital depreciation for retail properties has been 6.3%, or about half as much as the overall CRE sector. These less brash movements mitigate pricing disconnects, allowing transaction volume to be less impeded. Through the third quarter of 2023, overall CRE sales volumes were down 55% from 2022, but retail transactions were off only 40%, the smallest decline among the five major CRE asset types.  

Income-Driven Investing Favors Retail

All corners of the CRE market are set to experience ongoing capital depreciation, as higher interest rates require an upward adjustment in yields. Once that adjustment occurs, and as buyers gain more conviction in debt and pricing expectations, buying opportunities will increasingly emerge. Given that significant cap rate compression is no longer a reliable outcome, income expectations—both from a stability and growth standpoint—will emerge as a more pivotal driver of property returns and portfolio performance. Retail stacks up favorably here, too, for several reasons: 

  1. Tenant demand remains robust, with the number of store openings announced this year outpacing closures, supporting favorable occupancy and mark-to-market rental rates, particularly in suburban Sun Belt shopping centers where demographic and economic trends are strongest. This is a multi-year phenomenon that is expected to continue.   

  2. Net operating incomes (NOI) have stabilized following rent abatements during the pandemic, and income returns over the past four quarters have been a healthy 5.2% cumulatively, exceeding returns for office, apartment and industrial assets. Retail sales per occupied square foot have increased by about 25% since 2019, giving landlords leverage to push rents.  

  3. The size of the investable retail universe has not grown meaningfully over the last decade. Construction of new retail CRE has been declining steadily since 2017, from already subdued levels. Construction hit a multi-decade low in the first half of 2023, as higher debt costs and a risk-off mindset among lenders slowed development to a halt. Limited supply in a market with already high occupancy presents an upside to income fundamentals.   
During times of capital markets uncertainty, investors tend to favor strategies that solidify income streams and limit downside risk—and retail shopping centers exhibit these characteristics. The Cushman & Wakefield baseline forecast, which assumes a modest economic recession in 2024, projects that retail asking rent growth will decelerate modestly from 4.3% this year to 3.3% in 2024, maintaining positive growth, while other sectors, such as multifamily and office, see average rent declines and negative NOI growth. Even in the industrial space, where fundamentals trend more robustly than retail on average, there is still a higher degree of variation across markets and subtypes due to the sector’s high concentration of new construction and a cyclical ebbing in demand. Investors are growing increasingly aware of retail’s resilience: over 90% of retail investors in the fourth quarter expected retail occupancy to remain the same or increase in 2024, and virtually all expected positive rent growth.

Although CRE investors will remain drawn to multifamily, industrial and certain niche property types, given their recent success and long-term potential, there is a growing opportunity for retail to absorb some of the pullback in office, which faces structural headwinds and excess inventory. Since 2019, the office sector’s share of Open-End Diversified Core Equity (ODCE) portfolios has fallen from one-third to one-fifth, as capital has funneled toward better performing, less uncertain sectors. Retail has not yet regained share from institutional players, but the pricing and income fundamentals make it an attractive option. In our forecast, cap rates for retail properties are expected to adjust upward in 2024 but remain lower than office cap rates over the next five years due to favorable fundamentals and comparatively lower risk premiums required by lenders and investors.

Lending Headwinds Not as Impactful for Private Investors

Debt remains an important part of most retail transactions, and the current environment is impacting deal flow and pricing. Eventually, the market will improve, but until that point, investors improve their odds of a successful transaction by bringing more equity to the table and targeting smaller deal sizes. Most retail transactions happen in this space, creating a unique advantage for private buyers who typically have greater access to cash, and strong local and community banking relationships to access debt for smaller transactions. More than three-quarters of investors we surveyed expect to be net buyers of retail in 2024, with the bulk of those coming from private capital groups targeting grocery-anchored neighborhood centers and unanchored strips in Southeast markets.

From leasing fundamentals to relative pricing and capital structure, the stars seem to be aligning for retail investment to outpace its recent performance in the upcoming investment cycle. While the sector is unlikely to experience the type of frenzied growth that other asset classes have experienced in the past, the case for retail as a relatively stable investment on a risk-adjusted basis is favorable. Private and institutional funds alike will have increased opportunities for value-add plays, as pricing continues to adjust and forced sales come to the market. Now is a good time to sharpen the pencils for opportunities across the retail sector.

Subscribe to Retail Insights
Get the latest Cushman & Wakefield Retail research delivered to your inbox.

Business Contacts

Barrie-Scardina-Northeast Regional President
Barrie Scardina

President of Americas Retail Services, Agency Leasing & Alliances
New York, United States

Download VCard

Alanna Loeffler

Managing Director of Business Strategy
San Francisco, United States

+1 (516) 6583832

Download VCard

Jim Kierski New York Retail
Jim Kierski

Head of Retail Consulting, Americas
St. Louis, United States

Download VCard

Related Insights

main streets across the world 2023

Main Streets Across the World 2023

In this 33rd edition of Main Streets Across the World, we’ll explore the near-term outlook for the retail sector; headline rent and ranking changes for best-in-class urban locations across the world; key indicators and global main street rankings; and key trends to watch such as the cost-of-living crunch, e-commerce and more.
Dominic Brown • 11/21/2023
retail resilience

Retail Resilience: Retailers Put to the Test

In part two of this three-part series, we assess what retailers are doing to navigate the economic environment and the implications for retail CRE demand over the coming years.
James Bohnaker • 11/6/2023
Women shopping for clothes

Retail Resilience: Consumers at the Helm

This is part one of a three-part series that explores the remarkable resilience of the retail sector and sheds light on its continued growth in an ever-evolving landscape.
James Bohnaker • 9/27/2023

Ready to talk?

Our professionals are ready to provide further details on this and many other topics.

With your permission we and our partners would like to use cookies in order to access and record information and process personal data, such as unique identifiers and standard information sent by a device to ensure our website performs as expected, to develop and improve our products, and for advertising and insight purposes.

Alternatively click on More Options and select your preferences before providing or refusing consent. Some processing of your personal data may not require your consent, but you have a right to object to such processing.

You can change your preferences at any time by returning to this site or clicking on  Cookies

More Options
Agree and Close
These cookies ensure that our website performs as expected,for example website traffic load is balanced across our servers to prevent our website from crashing during particularly high usage.
These cookies allow our website to remember choices you make (such as your user name, language or the region you are in) and provide enhanced features. These cookies do not gather any information about you that could be used for advertising or remember where you have been on the internet.
These cookies allow us to work with our marketing partners to understand which ads or links you have clicked on before arriving on our website or to help us make our advertising more relevant to you.
Agree All
Reject All