Smaller Deals and Higher Rates
As credit markets tighten, smaller deal sizes grow in popularity.
- Grant Emery
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Coming out of the first quarter, the capital markets were a bit shaky following the collapse of SVB, Signature Bank, and Credit Suisse (who would shortly be joined by First Republic Bank). As time passed the threat of contagion subsided and banks proceeded cautiously and deal making resumed, albeit a slower pace. Preliminary estimates show just under $19 billion in total US retail transaction volumes, excluding entity-level transactions, a 57% decline YoY, and a 33% decline vs 2019. The Southeast was the most active market in the first half of the year with over $4.6 billion in sales, followed by the West Coast and then the Northeast at $4.4 billion and $3.0 billion, respectively.
Grocery-anchored retail retained its position as the most heavily transacted multi-tenant retail sub-type by volume ($3.6 billion) followed by unanchored strip centers ($2.6 billion) and then neighborhood centers ($1.7 billion). In addition to being the most actively traded sub-type, grocery-anchored center also priced the most aggressively with the average cap rate coming in at 6.85%. Cap rates varied widely by sub-type with power centers earning the highest going-in yield of 8.72%, then community/neighborhood centers at 7.40% and unanchored strips at 7.05%.
One of the persistent trends in the retail capital markets is the trend of “smaller is better”. This is largely a result of debt market conditions and lenders unwillingness or inability to lend on large acquisitions. However, lenders have been able get more comfortable with smaller deal sizes and it has shown up in their quotes. Using JLL brokered deals as a proxy for the market, the average the interest rate on a sub-$30 million retail CRE loan was around 6.1%, more than 50 bps lower than transactions above $30 million. The other ubiquitous trend is the preference of shorter loan terms, with over 75% of deals having a duration of 5-year or less in the first half. Fortunately, lenders and investors are no longer afraid of retail as an asset class given the strong operating fundamentals, as such, we should expect to see more capital flowing into the space as the capital markets unthaw.