Continued caution in the retail sector has masked opportunities for strong, risk-adjusted returns. For years, commercial real estate investors have struggled to find high-yielding assets. Now open-air, non-grocery-anchored centers are emerging as a significant buying opportunity.
Three key factors are behind the enthusiasm for retail, especially open-air, non-grocery anchored centers:
1. The Worst Is Over
Open-air retail has gone through a period of great consolidation and transformation, the e-commerce growth rate is flattening and brick-and-mortar is now poised for growth.
2. Strong Consumer Balance Sheets
Thanks in part to COVID stimulus, most consumer balance sheets (savings and debt levels) haven’t been this strong in decades. Additionally, the adoption of hybrid working strategies means people will more frequently be working from home offices, which will increase foot traffic in nearby suburban retail.
3. Cap Rates Too High Relative to Rent-Growth Projections
When compared to the cap rate/rent-growth-projection relationship of other commercial real estate asset types, retail is significantly undervalued. Growing institutional interest will provide additional opportunity for cap rate compression in the sector.