Moving The Market

Retail sales are headed for a comeback, and with it the investment sales market for strong-performing multi-tenant retail centers.

As U.S. economists boost their GDP estimates and Americans receive their tax returns, stimulus payments and vaccinations, the future for brick-and-mortar retail is looking better.  Despite the  pandemic, demand from investors for gro- cery-anchored and service-anchored retail centers has continued at a strong pace. While the investor base has changed, and supply is constrained, retail investment sales brokers say that what is on the market in these asset types is selling — and selling quickly.

Shopping Center Business recently spoke with a number of retail investment sales brokers across the country to see who is buying, who is selling, what is being sold and at what price.


With all the doom-and-gloom in the mainstream press regarding retail, one might be led to believe someone who acquires a retail center today is looking for trouble. The opposite is true, say investment sales executives. Grocery-anchored centers, and smaller, service-oriented centers with essential retail goods have proven themselves to be resistant to internet sales, a recession and a pandemic over the past year.

Grocery-anchored centers, in particular, saw a boost in activity due to the pandemic. According to the U.S. Census Bureau, total  grocery  store  sales  in 2020 were $757.6 billion, up 10.8 percent from 2019’s volume.

“Those increased sales add to the stability of that product type, as well as its ability to weather not only a pandemic, but a recession,” says Kyle Stonis, managing principal, investment properties group, with SRS Real Estate Partners, who is based in the firm’s Atlanta office.

“We are going to continue to see strength in the grocery-anchored retail sector. The amount of capital that is flocking to that product type of retail is significant.”

“Whether they were delivering or whether people were going to the store to shop, grocery stores stayed open,” adds Brian Whitmer, vice chair and executive director of the Metropolitan Area Capital Markets Group at Cushman & Wakefield, who is based in East Rutherford, New Jersey. “By virtue of the grocery stores staying open, a lot of the adjacent tenancy benefitted. There were many well-positioned shopping centers coming into the COVID-19 pandemic that had tenants centered around convenience, essentials, service and medical uses who also stayed open. That’s allowed the market for grocery-anchored centers to firm up very quickly.”

The continued resilience of grocery and service-anchored retail has given astute investors a reason to take a second look at essential retail categories over the past year, and many investment sales executives expect that interest to expand to other types of retail assets as the U.S. economy continues to recover from the impact of COVID-19.

“Essential retail has become a new category of tenant that investors look for,” says Steve Collins, partner with Augusta, Georgia-based The Palomar Group. “Having essential retailers in your center is certainly desirable, but I also believe that it is great to have tenants that are not considered essential, but who were able to weather the storm that was 2020.  Tenants who were shut down for months, but who figured out how to keep their businesses alive, are tenants you want.”

The example of getting back to business led by grocery stores, service retailers and restaurants has inspired other retailers to get innovative with how they can operate.  That is leading to more tenants reopening and a new way of doing business for more retail categories, which is bolstering the confidence of those who invest in retail properties.

“Brick-and-mortar businesses will continue to return to some form of pre-COVID normalcy as society gets back to needing traditional in-person retail shopping experiences to balance online retailing,” says Bill Asher, executive vice president of Hanley Investment Group, based in Corona del Mar, California.

“What we thought was good pre-COVID is even better post-COVID,” says Whitmer. “We had this incredible stress test.” 

Those facts are putting retail on the radar of many who invest in real estate and who may have shied away from retail in recent years. Retail also enjoys the benefit of long-term leases — a characteristic that office and multifamily properties do not have.

“Most people who invest in retail enjoy the higher cash flow, the long-term leases, the fact that they don’t have to worry about evicting someone who may end up on the street, and that their tenants are generally self-reliant,” says Brad Umansky, president of Progressive Real Estate Partners in Rancho Cucamonga, California. “Retail is also much less physically management intensive compared to office or apartment buildings.”


The pandemic has made buyers and sellers think twice about where they want to own grocery-anchored assets, even within particular markets.

“There is a focus on the suburbs,” says Melina Cordero, managing director, retail, capital markets, for CBRE. “There is also a focus on growing secondary cities like Denver and Austin. Generally, we are seeing some larger markets like San Francisco and New York have less interest.”

Markets with high barriers to entry are always in strong demand, and that has proven even more so in the past year, even in states where there were extended lockdowns.

“We are seeing retail businesses that are internet-resistant and that performed well during the height of the pandemic as the type that tenants want,” says Asher. “Even where there was some vacancy or a business that was temporarily closed due to COVID restrictions, investors were still purchasing well-located, Class A properties at premiums similar to pre-COVID pricing.”

As an example, Hanley Investment Group recently negotiated the sale of Village Plaza at Huntington Harbour, a 20,328-square-foot multi-tenant retail center located along the Pacific Coast Highway in Huntington Beach, California. The center, which features restaurants and lifestyle tenants, was 91 percent occupied at the time of sale.

In addition to California, Asher has also seen activity flow from California investors who see pricing as more attractive into areas like the Midwest.

“There continues to be an unprecedent- ed number of buyers from the western part of the U.S. who are willing to pay   a premium above what local buyers will pay for quality multi-tenant real estate,” he says. “The influx of out-of-state capital has forced some local Midwest investors to pay lower cap rates or remain on the sidelines.”

Markets that had shorter lockdown periods during the pandemic are also of particular interest to investors.

“We have seen a strong preference for the Southeast,” says Ryan McArdle, partner with The Palomar Group. “The fact that retailers in many of these states have either been able to stay open or have opened back up earlier than the rest of the country has allowed buyers to underwrite the risk profile of the tenants with a higher degree of confidence than other markets across the country where retailers have been more restricted.”


The investment sales market for shop- ping centers slowed immediately as the pandemic shut down began — and took a while to thaw. Whitmer’s team at Cushman & Wakefield brokered the sale of six shopping centers in the first three months of 2020; the team closed on the sale of one center in the last nine months of the year.

“When COVID hit, and all the retailers had to close, you had zero transparency into which tenants would survive and which rents would be paid,” says Whitmer. Private capital has dominated the acquisitions market for grocery-anchored retail sales in recent months. With fewer investment constraints and generally deep pockets of cash, these investors are able to buy centers with either all cash or with significant capital investment so that financing isn’t an issue.

“These entrepreneurial investors who came to the market understood the market, and the real estate, and they were willing to take perceived risk to acquire the center at a yield that was higher than it would have been pre-COVID,” says Whitmer.

“As those data points continue to set, and consumers return to old ways as vaccines roll out widely, private capital is being raised to invest in retail. The institutional investors will follow once the investment committees and portfolio managers have comfort in looking at more data points.”

Private capital accounted for 45 percent of all retail real estate acquisition volume in 2001, according to CBRE. In 2009, that figure rose to 55 percent. In 2020, 64 percent of retail volume was purchased by private buyers.

“The buyer profile is  changing,”  says Cordero. “There is a lot of private capital sitting on  the  sidelines right now, especially opportunistic capital.”

Investment sales firms kept busy in 2020 by doing a lot of behind-the- scenes work to prepare properties for listing, says Cordero.

“There was a lot of brokers opinion of value activity and underwriting activity; all of those things you don’t see from the other side until a property goes to market,” says Cordero. “Everything that we are seeing behind the scenes suggests that there is going to be a pretty big pipeline of centers coming through during the second half of the year.”

Many investment sales brokers are seeing bids for grocery-anchored centers much higher than anticipated and pricing higher than expected.

“We are seeing cap rates at or below where they were pre-COVID,” says Cordero. “There aren’t a ton of assets on the market, but there is a ton of capital itching to deploy into retail. There’s an abundance of bidders because there is so little supply. There is a perception that pricing has been dislocated through COVID, and it has not for grocery-anchored centers.”

Institutional investors and REITs are playing their cards in safe mode.

“With the exception of portfolio deals, individual investors and smaller firms have been the most active investors in the Southeast, but we are beginning to see REITs and institutional investors come back to the table,” says McArdle.

1031 investors have been a big player in the market for grocery-and service-anchored centers over the past nine months as they recycle capital from other investments.

“The types of investors that are actively acquiring multi-tenant properties are 1031 exchange buyers trading out of multifamily in search of a better yield, private investors looking to put available equity to work, and opportunistic buyers seeking value-add assets for redevelopment, or larger shopping centers with a future break-up sale strategy,” says Asher. “The most interest and highest velocity of transactions continue to be for assets priced $2 million to $6 million, where the largest pool of buyers currently exists.”

What’s stopping deals? Financing is one big piece of the pie. Lenders are hesitant to place money into centers where there may be some wavering tenants, or where a tenant had a rent abatement recently.

“Financing is still very difficult,” says Stonis, whose comments were echoed by other sources. “Some of the smaller banks have stopped lending on retail as a whole. The lending needs to break loose a little bit further. We need more banks to make retail loans.”


The biggest obstacle holding up larger transaction volume in the sector is supply. “It has been many years since inventory has been this low in the retail sector,” says Asher. “It has created increased competitive bidding and some cap rate compression for certain multi-tenant assets depending on the location and tenant mix.” While the sector shows a lot of interest from buyers, the volume is constrained by the lack of properties for sale. Some of that comes from market confidence. Pre-COVID, retail was facing a lot of headwinds, some of which the COVID pandemic has dispelled.

“Sellers may have taken a property to the market pre-COVID and gotten a terrible reception from buyers, so they don’t have much confidence that the market has improved post-COVID,” says Aaron Johnson, managing principal in the investment properties group in the Dallas/ Fort Worth office of SRS. “They need evidence that there is better pricing out there. There’s a tremendous amount of demand for quality retail, but those with the assets are a little hesitant to go out and test the market without some type of real pressure behind them.”

Supply is flowing from a few sources: funds and other “timed” investments that are expiring, REITs and others who have to deliver returns to investors.

“We’ve seen a decent amount of supply coming from both institutional and private owners,” says David Rivers, partner with The Palomar Group. “Many of the clients we work with have a simple model: buy, add value, cash flow for five to seven years, sell and recycle the capital. Assets that don’t have a critical flaw — vacancy loss or a dark anchor due to the COVID crisis — are viewed by owners to be just as sellable, if not more sellable, today than they were pre-COVID.”

Equity funds, family offices and individual investors have been sellers recently. A few REITs have pruned a non-conforming asset here and there. Other institutional owners — like large equity funds — have sold assets whose investment periods were maturing.

As institutional groups prune their portfolios, some are seeking to reduce their overall retail investments, while others are focusing on certain metropolitan areas and selling assets that don’t fit in with others.

“The institutions and REITs have been net sellers for the past two years,” says Cordero. “Generally, institutional owners are holding on to their core and grocery-anchored properties.”

“Some REITs are starting to look at assets they consider to be lower growth,” says Johnson. “If it is a stable asset where there is not much opportunity for them to grow the net operating income, they are exploring selling those types of centers in search of higher growth opportunities and upgraded locations within markets. The problem in doing that is they have to identify properties to buy to replace that income so they can pay their dividends. They can’t just sell something and sit on cash.”

Johnson says many retail owners are willing to sell if a buyer comes along with a strong offer, but they will not actively list properties for fear of a negative reception on pricing, or the stigma a property might receive if it is pulled from the market for failing to achieve pricing expectations.

With public investors, many institu- tions are sensitive to the media atten- tion focusing on the effect of ecom- merce has on certain retail categories. That has cast a shadow on a lot  of  retail properties in general.

“In general, we see institutional groups reducing their retail  foot- print,” says Stonis. “That’s going to continue to happen over the next few years.”


Investment sales professionals are in agreement that the second half of 2021 is poised to generate a ton of activity. As transaction data from the past three quarters enters the market, REITs and other institutional investors will be provided with more surety in the marketplace. Many are expected to become buyers.

“Anytime you bring the institutional money into the mix, you will have a stabilizing effect over the market,” says Stonis. “It helps stabilize prices further than where they are. We need that support on the pricing side. While the private groups have been very aggressive — there was a lot of pent-up capital in 2020 that has been put to work — we don’t know how long that will continue because we don’t know how much private capital is out there. We need institutional support to keep the capital markets side moving in the right direction.”

As re-openings continue, investment sales brokers see cap rates stabilizing between what was essential during the pandemic to what is less essential.

“A lot of business that weren’t able to operate in the pandemic are going to have pent-up demand,” says Gary Chou, partner with Berkeley Capital Advisors in Irvine, California. “Logic should tell us that people will eventually come back to a lot of retail strip centers that struggled during the pandemic and that cap rates will normalize. Right now, there is a spread between essential retail — like fast food restaurants and grocery — and other retail properties.”

The grocery frontier also continues to expand. Players like Sprouts, ALDI and Lidl have made good on the store counts they promised, opening a number of locations nationwide. Amazon has quietly entered the brick-and-mortar grocery store market in a number of metropolitan areas nationwide, mostly taking older grocery space. That brings another credit tenant into play for investors.

Power centers may also make their way to the market as investors show more interest toward big box retailers that survived and thrived during the pandemic.

“We will likely see some more box-anchored centers come to market after we’ve seen a stabilizing effect on net operating income,” says Stonis. “Last year, it was very difficult to substantiate NOI on larger properties with so many tenants and so  many boxes, but I think we will be to a point where we can get over that hurdle soon. Then, we’ll see more of that product type come to market.”

While tenants like Best Buy and Target experienced increased traffic and stellar sales in 2020, the perception outside the industry is that many big box retail categories are seeing declines due to ecommerce.

“Power centers haven’t been selling because the lender community sees them as high risk because of the box component,” says Cordero. “The power center sector has probably one of the biggest mismatches between perception and reality. Well-located power centers with the right tenants have been performing well  through the pandemic. Tenants like Best Buy and Target saw store traffic up year-over-year. The perception, from lenders and non-retail people, is that big box retail is getting obliterated by ecommerce. Owners of big box properties who want to sell are hesitant to because they know the lender community and the buyer community do not perceive value to match how the assets are actually performing.”

Many power center owners are holding properties, until the time is right, but some brokers are seeing deals come to market driven by strong creditworthiness of large retailers. Berkeley Capital Advisors recently sold a 125,000-square- foot Lowe’s Home Improvement Center in Mason, Ohio, as well as an At Home location in Peoria, Arizona.

“If you have a Lowe’s Home Improvement or Home Depot, those have done quite well along with Walmart and Target,” says Chou. “Power centers are coming back into interest. Some of them have performed decently throughout the pandemic, depending on the proportion of big box tenants in that center and its uses. Some sellers are taking this opportunity to split up their power centers and sell the pieces at strong cap rates, which allows them to hold parts of the center at a lower spread.”

While there are lessons to be learned from the past year, retail investment sales executives are bullish overall on the market, and excited for the future of the industry.

“If anything, the pandemic has brought a push of trends that were already happening in retail,” says Chou. “We’re going to see a lot of changes in the space that, hopefully at the end of the day, will be good for consumers, landlords and tenants.”

“The way that companies had to adjust in 2020 is only going to make them stronger going forward,” says Collins. “Adding drive-thrus, curbside pick-up, delivery, buy on-line pick-up in store — all of these features enhance the customer experience and make it easier for the company to shop their stores. The companies who were successful at adapting in 2020 will be the companies that are going to be successful going forward.”

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