Q1 investment volume subdued, but poised to accelerate

While geopolitical headwinds and economic uncertainty continue to persist in early 2024, U.S. retail fundamentals remain stronger than ever signified by a resilient Q1 retail vacancy rate of 4.1% coupled with limited new retail developments. This has encouraged healthy retailers, especially restaurants benefiting from increased dining spending, to continue expanding. Despite this strong fundamental performance, due to the prevailing high debt cost environment, U.S. retail investment volume decreased by 15% year-over-year in Q1 2024 (including deals of $5.0 million and above) to a total of $13.5 billion. Albeit it fell by the smallest portion relative to all other primary property types. Additionally, relative to the prior quarter of Q4 2023, transaction volume grew by 24% fueled by notable entity-level and portfolio deals including the River Oaks District.

Investment momentum is expected to persist over the next twelve months with further optimism in the back-half of the year when the Federal Reserve’s “higher for longer” interest rates are anticipated to begin cooling. This shift will likely encourage retail investors to be more acquisitive, and those who are less reliant on leverage will have an opportunity to acquire higher-quality assets.

Investors should also look forward to increased opportunities to purchase assets where the owners need relief from financial pressures. Persistently high interest rates and record-high property insurance costs are expected to make refinancing a challenge for maturing debt. By 2026, $45.2 billion in retail securitized debt is anticipated to mature. Expect this rise in financial stress to catalyze transactions over the next twelve months.

Further, in the face of limited new construction, anticipate further opportunities to arise from retailers acquiring existing brands to help drive their brick-and-mortar retail presence and market share akin to JD Sports Fashion’s recently announced plan to acquire Hibbett for roughly $1.1 billion as well as 7-Eleven’s completed acquisition of its rival Sunoco for $1.0 billion.

Capital demand is gravitating to the juxtaposition of “luxury” and “convenience”

Consumers today are increasingly spending dollars on both ends of the experiential spectrum, luxury, and convenience. The luxury market in the U.S. generates the highest revenue globally and is forecasted to reach $77.8 billion in 2024, according to Statista. This is fueled by an increasing global wallet of wealth, which is expected to reach $629 trillion by 2027, according to the Global Wealth Report 2023. Conversely, convenience and necessity are also increasingly on consumers’ minds given the overall U.S. personal savings rate is continuing to decline amid today’s high inflationary environment.

This juxtaposition of “luxury” and “convenience” has emerged as the most appealing for U.S. retail investors today. Resultantly, these investors are targeting irreplaceable luxury retail as well as convenient, unanchored strip and grocery-anchored retail assets. Increased retail luxury demand, particularly from international investors, has spurred notable retail luxury asset transactions in early 2024 including French Luxury house Kering’s acquisition of the 715-717 on Fifth Avenue and Swiss Luxury fashion house Akris’s acquisition of 772 Madison Ave. On the other side of the experiential spectrum, unanchored strip and grocery-anchored retail asset liquidity has grown significantly since the pandemic. In Q1 2024, the sectors in aggregate, accounted for 54% of the total number of U.S. retail multi-tenant transactions ($5M+), surpassing the portion in 2019 by 6.5 percentage points. Investors will continue to gravitate towards the sector due to its smaller check sizes and record-high yield premium with power centers. Expect this juxtaposition of acquisition composition to persist through 2024 and beyond.