The Conversation: Navigating the Complex Landscape of Retail Real Estate in 2023; Insights on National Trends
The dynamics of the commercial real estate market, especially within the retail sector, have been undergoing significant shifts. In a recent episode of “America’s Commercial Real Estate Show,” the show’s host engages in a thought-provoking conversation with Jim Costello, Head of Real Estate Economics at MSCI. The discussion delves into the challenges and opportunities faced by the retail real estate market in 2023, touching upon factors such as inflation, interest rates, and consumer behavior.
Retail Property Sales and Income:
As the conversation unfolds, Costello emphasizes the surge in retail property income over the past year, observed on a national scale. However, he urges caution in interpreting this as a green light for prospective investors. The spike in income, according to Costello, is partly attributed to “Revenge spending” as consumers emerge from lockdowns. The challenge lies in distinguishing between a temporary rebound and sustained organic growth based on a healthy pace of personal income growth.
Consumer Confidence:
Bull raises concerns about a potential drop in consumer confidence. Costello, however, dismisses the significance of consumer confidence metrics, emphasizing the need to focus on tangible indicators like growth in disposable personal income and household information. Despite uncertainties such as rising interest rates and inflation, consumers appear to have the financial capacity to sustain spending.
Performance of Retail Properties in 2022:
Costello reflects on the performance of the retail sector in 2022, highlighting surprising trends in occupancy and rent growth at the national level. The interviewee acknowledges the quick resurgence in income but warns against expecting double-digit growth to persist unless there is a structural change in the economy’s relationship with retail.
Retail Property Transaction Volume and Cap Rate Trends:
The retail sector in 2022 stood out as the only one with increased deal activity compared to 2021, and this trend is observed on a national scale. Costello attributes this growth to a rebound effect, particularly in shopping center sales. However, he notes a decline in deal volume in the fourth quarter of the year, mirroring challenges faced by all sectors due to higher interest rates and mortgage costs.
Cap Rate Projections for Retail Properties:
Addressing cap rate trends, Costello points out a modest uptick of around 20 basis points in national retail cap rates. He underscores the challenge in aligning buyer and seller expectations, leading to a disconnect in the market. Buyers are cautious, underwriting worst-case scenarios, while sellers adopt a wait-and-see approach, anticipating a future decline in interest rates.
Regional and Asset Type Perspectives:
Costello touches upon the regional variations in retail real estate nationally, emphasizing the importance of location and local economic health. He distinguishes between triple net retail and shopping centers, noting the latter’s stronger recovery due to increased consumer activity in community and neighborhood centers.
Conclusion and Future Outlook:
In conclusion, Costello advises investors to focus on income and areas experiencing population and income growth on a national level. Despite shifts in consumer patterns, he disputes the notion that retail is obsolete, emphasizing the need for creativity and adaptability. The conversation concludes with insights into the challenges faced by brokers in bridging the gap between buyer and seller expectations.
As the retail real estate landscape continues to evolve nationally, this conversation provides valuable insights for industry professionals navigating the complexities of the market in 2023, acknowledging variations that can and do exist from Miami to other parts of the country.