Retail Investment Expected to Grow in 2017 With Focus on Secondary Markets

Naveen Jaggi
Naveen Jaggi
President, Retail Advisory Services & Capital Markets, JLL

While retail is proving to be the slowest real estate segment to recover from the 2008 market crisis, there is good reason to be optimistic about the prospects for the sector.

U.S. retail investment sales fell about 19 percent to $64.3 billion in 2016, in line with other real estate segments. Yet fundamentals remain healthy, leading many to forecast growth this year as the industry shifts to developing secondary urban markets and institutional and foreign REIT investment activity continues to rise.

With that, there are four key takeaways from the performance of retail real estate in 2016:

Well-located shopping centers remained a staple investment

While investors await Trophy product, they are looking to well-located shopping centers, where there is a wider selection of desirable assets supported by strong demographics. This theme has persisted over the past five years and investors are likely to continue expanding their scope of viable shopping centers.

Sales of Tier 2 malls stagnated

Tier 2 malls are proving more difficult to transact than their Tier 1 counterparts, leading to a decline in overall mall volume of 11 percent. Unlike previous years, only about 38 percent of malls transacted as part of a portfolio in 2016 (compared to nearly 80 percent in 2015), as buyers became less comfortable with the associated risks and unrealistic pricing expectations. Current owners will likely have to lower pricing expectations to transact these assets with greater frequency.

Institutional and foreign REIT investment rose

Led by strong acquisitions from investment managers, institutional investors increased activity by 2.2 percent, led by strong investment manager deal-flow – up nearly 78 percent – from groups such as Blackstone, TIAA, DRA Advisors and PGIM, which each invested over $1.0 billion in retail. There was also an uptick in foreign REIT activity, as domestic REIT activity remained muted amid political and economic uncertainty. Foreign REITS saw transaction volumes exceed $2.9 billion, an increase of over $2.5 billion from 2015.

There was a heightened focus on urban strategies

Urban retail investment has increased at a steady pace since 2008, as retailers chose to strategically close tertiary market locations while increasing attention on urban stores surrounded by strong demographics. With primary urban markets seeing tourism slow in 2016, secondary markets led urban investment as investors shifted focus towards growing secondary cities with young populations and healthy economies.

With these factors in mind, and as market conditions remain favorable, the outlook for retail investment is positive. Investment in well-located shopping centers and secondary markets coupled with a healthy transaction pipeline over the first half of the year should drive growth in 2017.

Naveen Jaggi
President, Retail Advisory Services & Capital Markets | JLL
Naveen Jaggi
Naveen Jaggi is President of Retail Advisory Services & Capital Markets at JLL. Naveen oversees all of JLL's retail tenant rep, agency leasing and capital markets brokers across the United States, and is a member of the Retail Global Leasing Board which coordinates JLL's retail leasing activity globally.
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