Retail Capital Markets: A Tale of M&A
Despite the sharp increase in treasury rates, retail REIT M&A transactions have trudged forward in a largely private capital market.
- Grant Emery
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US Retail Capital Markets – Q3 2023 Outlook:
The retail capital markets in the third quarter were largely marked by M&A transactions. Whether it be the announcement of Kimco’s acquisition of RPT Realty or the closing of two other M&A transactions. Entity-level transaction volume in Q3 was comprised of Global Net Lease’s (GNL) $3.9 billion acquisition of The Necessity Retail REIT (RTL) and Regency Centers’ (REG) $1.4 billion acquisition of Urstadt Biddle (UBP). The former of the two transactions was the larger both in volume and quantity of assets trading hands, with over roughly 649 assets totaling just over 22 million sq. ft., while the latter consisted of 77 properties and 5.3 million sq. ft. Both deals were all-stock transactions with RTL investors receiving 0.67 shares of GNL per share of RTL and UBP investors receiving 0.347 shares of REG per share of UBP, both transactions represented a 35% premium to the target company’s market value.
Outside of entity-level transaction the capital markets were relatively consistent with Q2, preliminary estimates of transaction volume (excluding entity-level) were roughly $9.9 billion, a slight decrease over the previous quarter and a 40% decrease over Q3 2022. Traditional gateway markets were the most liquid in the third quarter with New York, Los Angeles, and DC leading the pack. Regional transaction volume trends, however, remained unchanged with the Southeast and West Coast claiming nearly half of all sales. Continued uncertainty around the future of the economy has kept institutional investment managers sidelined, further increasing private capital market share which has now claimed 86% of all acquisitions year-to-date.
Retail cap rates, unable to escape the impact of an 85 bps increase in the 10-Yr Treasury, increased nearly 30 bps quarter-over-quarter. Unanchored strip centers were the most aggressively priced multi-tenant retail sub-type with an average cap rate of 7.1%, followed by grocery-anchored at 7.2%. Retail is still highly attractive on a relative basis compared to the other asset classes, with an average spread of 300 bps over the 10-yr (versus 185 bps for industrial and 95 bps for multifamily). We may see this pricing spread moderate as institutional investors and REITs begin to re-enter the market in a meaningful way over the next few quarters. For the time being, however, retail investors will continue to see accretive risk-adjusted returns.