Retail investors focus on quality and security for investments

First-quarter 2019 power center investments rose by 30.4 percent

May 20, 2019

Las Vegas, May 20, 2019 — JLL’s U.S. investment outlook, that launches today at the International Council of Shopping Centers’ RECon Conference, points to a slow start this year with overall transactions down 4.9 percent quarter-over-quarter through March 2019. Retail transaction volume in Q1 2019 totaled $11.1 billion nationwide. While transaction volumes are generally down due to the entity-level transactions that occurred last year, there are some positive data points highlighted by the 30.4% increase in power center transactions which marks the most active trading quarter since 2016. 

“We have quality retail product on the market, but it’s being met by a finicky buyer pool. We are finally seeing the bid-ask spread narrowing, as sellers become more educated about how buyers are underwriting risk and buyers are more willing to rise to seller expectations,” said Naveen Jaggi, President of JLL’s Retail Advisory Services. “In the year ahead, properties must have the right story, tenant mix, community appeal and location. If it’s not a close to perfect fit for investors, sellers are less likely to achieve anticipated pricing goals staling transactions.” 

Retail Fundamentals for Q1 2019:
  • Net absorption for major U.S. markets totaled 5.3 million square feet in Q1, down 67.4 percent quarter-over-quarter and down 61.9 percent year-over-year. 
  • Retail construction continues to decline helping vacancy rates stabilize, with a mere 11.4 million square feet added in Q1, falling 24.0 percent quarter-over-quarter. 
  • Despite weak absorption, vacancy remains both low and flat at 4.4 percent for total retail, with mall vacancy holding at 3.6 percent. 
  • Retail rents rose 1.4 percent from the previous quarter, and 5.4 percent year-over-year. 
  • Who’s Buying and Selling: 

In the last 18 months, opportunities of scale drew the strongest investor interest. Now buyer pools for large-ticket transactions are thin, apart for assets under $100 million where interest in increasing.

While institutional investment into retail declined by 7.8 percent in the first quarter of 2019, we are seeing institutional investors taking on smaller transactions, as opposed to portfolio transactions which were previously targeted. “There is an influx of larger, higher quality assets hitting the market which is enticing institutional investors to get off the sidelines and reactivate their allocations in the sector,” added Chris Angelone, Retail Capital Markets Lead for JLL. 

REIT performance is also down quarter-over-quarter due to the outperformance last year partially attributed to the large-scale portfolios that traded. Where active, they continue to focus on high performing shopping centers and some strategic urban acquisitions — for example Regency Centers purchased Melrose Market in Seattle’s Pike Street Corridor in the first quarter of 2019 for $15.5 million. 

Cross-border groups remain slower to transact in the U.S. due to a more cautious stance given the structural changes in the retail sector.

What’s trading and where? 

Capital placed this year will be in well-located shopping center assets or urban retail corridors in either primary or high-growth secondary markets. The average deal size of single assets that transacted in the first quarter grew by 28.9 percent in primary markets, and 20.5 percent in secondary markets as investors become more willing to pay higher price tags for well-positioned assets.

Power center transaction volume outperformed, increasing by 30.4 percent over Q1 2018, marking the most active first quarter since 2016. Investors are keen on the value creation opportunity that exists in the power center space, and activity was driven by private investors comfortable with the risk profile.

Investors continue to seek top grocery-anchored assets, placing heightened emphasis on the grocer’s brand and overall health ratios within the centers. Single-asset grocery transaction volume remained stable, increasing by 2.3 percent over Q1 2018. However, average price per square foot for grocery assets increased by a notable 20.7 percent from this time last year, averaging $255 per square foot. 

“We expect the most active investors this year will be private capital, as other investor types hesitate to transact due to risk aversion and cyclical changes. While the deal sizes are likely to be smaller – with the most active transaction space under $30 million — these operators have expertise and confidence in the fundamentals and are taking advantage of very attractive debt financing,” shared Angelone.

Debt financing 

The interest rate environment is more supportive of investment in 2019 with long-term yields lower alongside much-diminished prospects for further Fed policy rate hikes. The equity markets broadly recovered during Q1 2018.

“The Fed has indicated that it will be flexible on policy and is in no hurry to raise interest rates. We believe that should ease some pressure on markets this year, given that some of the secondary markets were experiencing volatility. This has also slowed the cap rate volatility, which should support increased transactions,” added Jimmy Board, Managing Director of Capital Markets, Finance for JLL.

Overall, transaction activity is anticipated to grow slightly in 2019 exclusive of large entity level transactions. Investor appetite for retail is increasing; fueled by high quality, risk appropriate buying opportunities as well as a fully functioning financing market. Good retail remains just that, and lenders are responding accordingly. 

At JLL, we are passionate about retail. We deliver great experiences for shoppers — from high streets to shopping malls. As the leading third-party retail service provider, we have access to more than 2,000 centers totaling 164 million square feet under management, for lease and/or sale. Our more than 950 retail experts spanning over 40 markets, support 1,585 clients by delivering management solutions, restructuring or renewing leases and debt, providing disposition or investment strategies and/or evolving retail space to keep pace with the ever-changing consumer. See how we’re helping our clients achieve their ambitions and subscribe to the Where We Buy podcast series for real talk on the trends impacting retail.

About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.3 billion, operations in over 80 countries and a global workforce of over 91,000 as of March 31, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit