Investors search for deals as volumes slip
Q1 retail transaction volumes were heavily suppressed relative to last year but data suggests that appetite is still there.
- Grant Emery
If the first quarter could be summarized in one word it would probably be volatile. Between the collapse of SVB and Signature Bank and the looming threat of contagion among regional banks and the subsequent 50 bps drop in the 10-yr treasury, retail CRE was seemingly spared. Preliminary transaction volumes for Q1 were roughly $16.5 billion, down 29% YoY but only down 1% from the previous quarter. Bolstered by GIC’s acquisition of STORE Capital for $15 billion, of which $7.1 billion was attributed to the retail portfolio. The transaction marks the largest M&A deal in the retail space since the Realty Income/VEREIT merger in late 2021. Outside of M&A activity, grocery-anchored and small format retail dominated the market with $1.7 billion $1.8 billion in total volume respectively. Large variations in regional volumes persisted in the period with the Western US and the Southeast continuing to claim the largest share of transactions by volume, the two regions were also the most aggressively priced markets.
Average retail cap rates expanded slightly quarter-over-quarter, with average multi-tenant retail yields increasing 18 bps to just over 7.1%. This moderate cap rate expansion can be traced to two primary culprits: the increased level of volatility driving higher debt spreads and the lack of core product transacting in today’s market. The average all-in interest rate on retail commercial mortgages in the first quarter was 6.4% (using JLL transactions as a proxy for the market), a nearly 40 bps increase over the previous quarter. Regional and local banks, despite banking turmoil, remained the most active lender in the space with 44% of total transactions, followed by life insurance companies with 20%. Perhaps more interesting was the re-emergence of CMBS lenders in the retail sector. Of the 6 conduit CMBS deals that have priced this year retail has been the largest property type in three and the second largest in two.
Source: JLL Research, Bloomberg Finance LP
While transaction volumes have been suppressed over the past quarter, interest in retail has not. The average number of bids per deal in Q1 was up 32% quarter-over-quarter. Volatility, however, did result in a significant widening in the bid-ask spread for retail assets. On average, the winning bid in Q1 was 5.4% lower than initial pricing expectations. That spread varied widely by asset quality, with core and opportunistic deals closing much lower than asking prices relative to value-add and core plus deals. As long as debt costs remain elevated and lenders become more risk averse it’s likely that we will continue to see a lack of appetite for core product as well as riskier, opportunistic assets.
Source: JLL Research (based on JLL transactions)