What Doesn’t Kill You, Makes You Stronger

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Wealth Management Real Estate (formerly NREI)

By Ed Hanley, President, Hanley Investment Group

“What doesn’t kill you, makes you stronger” comes from an aphorism of the 19th-century German philosopher Friedrich Nietzsche and it seems to be characteristic of the retail survivors that have retooled and adapted to the mass shift in consumer behavior that was accelerated by the pandemic. Some of the many changes include adding or enhancing e-commerce, mobile ordering apps, curbside pick-up options, delivery services, along with finding new ways to connect with customers and altering the footprint to streamline operations and/or add more drive-thru lanes. The same could be said for consumers, who are eager to spend money on items and experiences that they felt deprived of during the pandemic—unleashing their pent-up demand or what some call “revenge shopping.”

Fastest retail growth since 1984

On June 9, the National Retail Federation raised its outlook for 2021, citing a quicker-than-expected recovery and eagerness to shop. Retail sales are expected to grow between 10.5 percent and 13.5 percent to an estimated total of $4.44 trillion to $4.56 trillion in 2021. Non-store and online sales, which are included in the total figure, are expected to grow between 18 percent and 23 percent to a range of $1.09 trillion to $1.13 trillion as consumers continue to utilize e-commerce. The numbers exclude automobile dealers, gasoline stations and restaurants. That compares with $4.02 trillion in total retail sales in 2020 (of that, $920 billion was from purchases made through non-store and online channels) and $3.76 trillion in 2019. “The combination of vaccine distribution, fiscal stimulus and private-sector ingenuity have put millions of Americans back to work,” said NRF President and CEO Matthew Shay in a press release. “While there are downside risks related to worker shortages, an overheating economy, tax increases and over-regulation, overall households are healthier, and consumers are demonstrating their ability and willingness to spend. The pandemic was a reminder how essential small, mid-size and large retailers are to the everyday lives of Americans in communities nationwide.” The NRF cited that Americans are ready to resume some normalcy of living, working and playing. Given the strength of consumer spending, Kleinhenz noted he anticipates the fastest growth the U.S. has experienced since 1984. The reopening of the economy has accelerated much faster than most had believed possible, even a year ago.

New store openings

As a result of the pandemic, many landlords worked closely with their tenants to offer more flexible leases and cheaper rent and it has paid off. Datex Property Solutions reported that May 2021 rent collections for both national tenants and non-national tenants had reached 90.85 percent (compared to 61.40 percent in May 2020). Today, many chain stores are taking advantage of current market conditions and pandemic-related closures to open new locations. Many of the same chains that opened stores last year have been expanding in the first half of 2021 and it appears that this will continue. Some of the chains looking to expand include Target, ULTA Beauty, Sephora, Burlington, Ross Stores, Gap’s Old Navy and Athleta, Tractor Supply, Ollie’s Bargain Outlet, Lidl, Aldi, Sprouts Farmers Market, At Home, Big Lots and Five Below. Three dollar store chains—Family Dollar, Dollar Tree and Dollar General—will  make  up  about 45 percent of the anticipated 3,597 store openings that large chains in the U.S. have announced so far this year, according to Coresight Research findings from early May, cited by CNN.

Inflation concerns

For the past decade, inflation has averaged under 2 percent a year for the typical American. However, the Consumer Price Index rose 5 percent between May 2020 and May 2021, according to the U.S. Bureau of Labor Statistics report — the biggest jump since 2008. Even the core rate, which removes food and energy prices, was up 3.8 percent, a three-decade high. And, it is no surprise that housing prices have increased. The S&P CoreLogic Case-Shiller 20-city home price index in the U.S. posted a 14.9 percent year-over-year gain for April 2021, up from 13.4 percent in the previous month. It was the largest annual price increase since December 2005. Phoenix reported the highest yearly gain among the 20 cities in April with a 22.3 percent price increase, followed by San Diego (21.6 percent) and Seattle (20.2 percent).

Although there has been an uptick in mortgage rates, the 30-year fixed rate is still historically low. The work-from-home model, safety concerns and local government’s restrictive measures especially in the city centers have encouraged potential buyers to move from urban apartments to suburban homes, which impacts where retail is thriving. Strong consumer spending on merchandise—in part driven by government stimulus—and supply chain interruptions have led to lean inventories and a growing backlog of orders. Furthermore, the lifting of pandemic restrictions with the increasing number of vaccinations and the whirlwind of social and recreational activities have created more demand for services.

Multi-tenant retail is back

At the height of the pandemic, very few large shopping centers traded hands. According to CoStar, there were 1,208 retail properties that traded over $15 million in the U.S. from March 1, 2019 to February 28, 2020. Once COVID-19 hit, the number of transactions for $15 million and above (March 2020 to February 2021) decreased by 30.22 percent to 843 transactions. During 2020, most retail investors wanted to stick to single-tenant and multi-tenant pad buildings featuring preferably a drive-thru on the endcap and essential businesses in the remaining spaces. Now, with little to no new product coming on the market, higher demand and low inventory are driving cap rates for high-quality retail assets to compress below pre-COVID-19 levels. Hanley Investment Group is seeing demand accelerate for anchored and shadow-anchored multi-tenant retail properties in many markets around the country, particularly in suburban markets in states that have had a less restrictive response to the pandemic.

For example, Hanley Investment Group recently represented a California 1031 exchange buyer in the purchase of Alpharetta Commons, a 94,500-sq.-ft., 98.7-percent-occupied shopping center anchored by Publix Super Markets in one of northern Fulton County’s most affluent suburbs, Alpharetta in the Atlanta metro area. The sale price was $24.6 million. The average household income within a three-mile radius of the property is over $163,000 for the 86,000 residents. Nearly 209,000 people reside within five miles of the shopping center. The seller was an institutional real estate owner, operator and developer of a national portfolio.

Hanley Investment Group also represented a California exchange buyer in the recent purchase of Cofer Crossing, a fully leased 136,139-sq.-ft. shopping center anchored by Kroger and HomeGoods located in the Atlanta-area  community of  Tucker, Georgia.  The sale price was $20 million. Cofer Crossing is  shadowed by Walmart, and Kroger recently acquired a former Shell Station located at the entrance of Cofer Crossing, which has since been renovated into a new Kroger Fuel Center, reflecting Kroger’s commitment to the property. The seller was a partnership between SITE Centers Corp. and Madison International Realty.

Fueling demand and transaction volume is not only the desire to have a hedge against inflation but also the concern over a proposed increase in capital gains tax in 2022 as well as the possible modification or elimination of 1031 exchange benefits. Other factors include the expanding number of multifamily investors who are trading out of California apartment buildings in search of out-of-state single-tenant and multi-tenant retail properties that offer little to no management.

With very little brand-new inventory being added, and more buyers jumping into the buyer pool in the $1 million to $20 million range, we expect to see more aggressive pricing in the coming months for shadow-anchored multi-tenant retail pad buildings that surpasses pre-COVID levels. Grocery-anchored shopping centers will be the most sought-after retail investment as private investors and institutional buyers look to upgrade their portfolio. Last month, Hanley Investment Group represented the seller in the sale of a grocery-anchored shopping center in Central California. The buyer was attracted to the fact the center was 100 percent occupied by a mix of essential, daily needs, service and restaurant tenants.

Value add-opportunities will also continue to attract savvy developers and investors. Hanley Investment Group has sold seven retail properties to date valued at $30 million in the execution of a break-up strategy at Highland Village Shopping Center, a new Sprouts-anchored shopping center in Fontana, Calif. The most recent sale, which took place in late May 2021, was the sale of a new construction, single-tenant retail building occupied by Sit ‘n Sleep. This sale marked the second sale of a single-tenant mattress investment sold in California since March of 2020. Hanley Investment Group also sold the previous single-tenant mattress investment property, a Mattress Firm in Mountain View.

Comparing the number of closed transactions in the first six months of this year to 2019 during the same period, Hanley Investment Group has already exceeded the number of closed transactions by a substantial margin with total sales volume up over 41 percent. Investor demand and investment sales velocity are at an all-time high with all indications that it is going to be another record-breaking year for Hanley Investment Group. And, likewise, retailers that are tuned in to their customers’ needs and wants and use multiple channels to maintain a close relationship with their customers and serve them well, will not only survive but thrive.