The 2023 U.S. Retail Sector: Trends, Shifts, and Opportunities for Investors (2024)

As experts in investment banking and strategic partners in the realm of real estate private equity, we at Lumicre continuously strive to provide our clients with the most up-to-date and comprehensive market insights. The recent “Retail National Report United States” from August 2023, reported by CoStar, offers a wealth of information that is crucial for large institutional investors, especially those considering the sale of their privately held partnership interests in the retail sector.

Key Highlights from the CoStar Report

1. Market Resilience:

The U.S. retail space market has demonstrated a striking level of resilience, especially noteworthy in the face of prevailing economic uncertainties that have characterized the early months of 2023. This resilience is not a sudden phenomenon but rather a continuation of a growth trend that has been consistent over recent years. Let’s delve deeper into the factors contributing to this resilience and what it means for institutional investors.

• Sustained Demand Growth: The demand for retail space has not only remained stable but has grown significantly, marking the ninth consecutive quarter of growth. This consistent increase in demand is a clear indicator of the underlying strength of the retail sector. It reflects a robust consumer base and a growing confidence among retailers in the viability of brick-and-mortar stores despite the rise of e-commerce.
• Diverse Sector Participation: The growth in demand has been fueled by a diverse array of sectors within the retail space. This includes traditional sectors like fashion and consumer goods, as well as emerging sectors such as experiential retail, which includes fitness centers, boutique studios, and specialty food services. The diversity in tenant mix adds to the market’s stability, as it is not overly reliant on any single sector.
• Adaptation to Consumer Trends: Retailers have been quick to adapt to changing consumer preferences, such as the demand for more experiential and convenience-oriented shopping experiences. This adaptability has played a crucial role in sustaining growth. Retail spaces are increasingly becoming community hubs, offering experiences that go beyond traditional shopping.
• Impact of Economic Policies: Despite macroeconomic challenges, such as fluctuating interest rates and trade uncertainties, the retail market has remained buoyant. Proactive economic policies and a generally strong labor market have partly driven this resilience, helping to maintain consumer spending levels.
• Real Estate Fundamentals: The fundamentals of real estate investment in the retail sector remain strong. The limited new supply of retail space has helped keep vacancy rates low, thereby supporting rent growth. This supply-demand dynamic is crucial for investors, as it suggests a continued potential for stable or increasing rental incomes.
• Geographic Variations: The resilience is not uniform across all regions. High-growth areas, particularly in the Sun Belt region, have seen more significant demand and rent growth compared to other parts of the country. This geographic variation presents opportunities for strategic investment, particularly in high-growth markets.

Implications for Institutional Investors

For institutional investors, this market resilience opens up several strategic avenues. It underscores the importance of being well-positioned in the retail real estate sector, particularly in markets showing strong growth and demand. Investors should consider diversifying their portfolios to include a mix of traditional and emerging retail sectors, as well as geographically spreading their investments to capitalize on regional growth trends.

In conclusion, the resilience of the U.S. retail space market, as highlighted in the CoStar Retail National Report, is a positive sign for institutional investors. It suggests that, despite broader economic challenges, there are substantial opportunities for growth and stability in the retail real estate sector. As your strategic partner, we stand ready to guide you through these opportunities and optimize your investment strategy in this dynamic market.

2. Sales Trends:

Recently, a fascinating dichotomy has characterized the United States retail sector, especially evident in the contrasting trends of sales and leasing activities. This divergence presents a complex but intriguing scenario for institutional investors:

• Strong Demand and Low Vacancy Rates: On one side of the spectrum, the retail sector has been buoyed by strong demand, as evidenced by the consistent growth in demand for retail space. This robust demand has contributed to historically low vacancy rates. The low vacancy rates are indicative of a healthy retail environment where retail spaces, especially in prime locations, are in high demand. This scenario often leads to competitive leasing conditions and can drive up rental rates, benefiting property owners and investors.
• Record-Breaking Sales Activity in 2022: The year 2022 marked a significant milestone in the retail sector, with sales activity reaching unprecedented levels. This surge surpassed previous records, indicating a robust appetite for retail investments among specific investor segments. A combination of factors, including the availability of capital, investor confidence in the retail market’s long-term prospects, and a strategic shift towards tangible assets amid broader economic uncertainties, contributed to the high volume of sales activity in 2022.
• Slowdown in Transaction Markets: Contrasting with the strong demand and low vacancy rates is the observed slowdown in transaction markets. This slowdown is particularly noticeable in the pace of sales transactions. Several factors contribute to this trend:
  Rising Interest Rates: The increase in interest rates has had a cooling effect on transaction volumes. Higher borrowing costs can lead to a reevaluation of investment strategies and a more cautious approach to new acquisitions.
  A. Market Uncertainty: General market uncertainties, including economic and geopolitical factors, have led to a more cautious stance among some investors. This caution manifests in the reduced pace of transaction activities.
  B. Shift in Investment Focus: There’s a noticeable shift in the focus of investors, with some moving away from traditional retail investments towards alternative sectors or different asset classes. This shift can impact the volume and velocity of retail property transactions.

Implications for Institutional Investors:

• Selective Investment Opportunities: The current sales trends suggest that there are selective investment opportunities in the retail sector. Institutional investors need to be discerning, focusing on properties and locations that align with the strong demand trends.
• Long-Term Value Consideration: The slowdown in transaction markets may also present long-term value opportunities. Properties that may be undervalued or overlooked in the current climate could offer significant returns as the market adjusts.
• Strategic Asset Management: For existing retail property owners, the current market conditions underscore the importance of strategic asset management. Enhancing the value of retail properties through redevelopment, repositioning, or improving tenant mixes can be key strategies in a market characterized by high demand but slower sales activity.

In summary, the diverging trends in the retail sector’s sales and leasing activities present a nuanced picture. While there are challenges associated with the slowdown in transaction markets, the strong demand and low vacancy rates highlight the underlying strength of the sector. For institutional investors, understanding these dynamics is crucial for making informed decisions and identifying opportunities in a market that, despite its complexities, continues to offer significant potential. As your strategic partner, we are committed to guiding you through these intricacies, ensuring that your investment strategies are well-aligned with the current market realities.

3. Insight on Investor Shifts in U.S. Retail Real Estate

The retail real estate sector is currently witnessing a significant shift in the landscape of investment sources. This shift features different investor types changing roles and strategies, especially the emergence of private investors as leading players and a more cautious approach from institutional and REIT (Real Estate Investment Trust) investors. Understanding these shifts is crucial for institutional investors to adapt their strategies accordingly.

Rise of Private Investors: Private investors have increasingly taken a prominent role in the retail real estate market. This group includes high-net-worth individuals, family offices, and private equity firms. Several factors contribute to this trend:

• Agility and Flexibility: Private investors often have more agility and flexibility in decision-making compared to institutional investors. This agility allows them to capitalize on opportunities more quickly and adapt to changing market conditions.
• Diverse Investment Strategies: Private investors are known for their diverse and sometimes more aggressive investment strategies. They are often willing to invest in higher-risk properties with the potential for higher returns, such as value-added and opportunistic real estate.
• Long-Term Investment Horizon: Many private investors operate with a longer-term investment horizon. This perspective allows them to weather short-term market fluctuations and focus on the long-term potential of their retail real estate investments.

Cautious Approach of Institutional and REIT Investors: On the other hand, institutional investors, including pension funds, insurance companies, and REITs, are exhibiting more caution in their investment strategies. Several factors influence this cautious approach:

• Risk Management: Institutional investors are typically more risk-averse, prioritizing the stability and predictability of returns. In a market with fluctuating dynamics, these investors may adopt a wait-and-see approach to assess risks better.
• Regulatory and Stakeholder Considerations: Institutional investors are often subject to stricter regulatory requirements and have a responsibility to a broader range of stakeholders. This responsibility can lead to a more measured investment approach.
• Portfolio Diversification: Institutional investors are increasingly looking to diversify their portfolios across different asset classes and geographies. This diversification strategy might lead to a reduced focus on retail real estate, especially in markets perceived as volatile or over-saturated.

Implications for Institutional Investors:

• Strategic Reassessment: Institutional investors may need to reassess their strategies in light of these shifts. This reassessment could involve exploring co-investment opportunities with private investors or considering alternative retail formats and emerging markets.
• Opportunistic Partnerships: The rise of private investors opens opportunities for strategic partnerships. Institutional investors can leverage the agility and innovative approaches of private investors while offering the scale and stability that comes with institutional capital.
• Focus on Core Strengths: Institutional investors might benefit from focusing on their core strengths, such as investing in high-quality, well-located retail assets that offer stable, long-term returns. This focus aligns with their risk-averse nature and commitment to delivering consistent returns to stakeholders.

In conclusion, the shift in capital sources within the retail sector reflects broader changes in the investment landscape. For institutional investors, understanding and adapting to these shifts is key to maintaining a competitive edge. By recognizing the strengths and strategies of different investor types, institutional investors can refine their approaches, identify new opportunities, and form strategic alliances that align with their investment objectives. As your strategic partner, we are here to provide insights and guidance to help you navigate these shifts effectively, ensuring your investment strategies remain robust and responsive to the evolving market dynamics.

4. Insight on Vacancy and Rent Trends in U.S. Retail Real Estate

Vacancy and Rent Trends: The retail real estate market is currently experiencing a unique phase characterized by exceptionally tight availability of retail space. As of the end of the second quarter of 2023, the vacancy rate has plummeted to a record low of 4.8%. This tight market scenario has several implications, particularly influencing leasing activity and rent dynamics.

Historically Low Vacancy Rates: The vacancy rate of 4.8% is unprecedented in the retail sector. This low rate indicates that tenants are leasing a significant portion of available retail space, resulting in a smaller inventory of vacant spaces. Factors contributing to this tight vacancy rate include:

• Limited New Supply: There has been a slowdown in the development of new retail spaces. This limitation in supply, coupled with steady or increasing demand, has naturally led to lower vacancy rates.
• Adaptive Reuse of Retail Spaces: Many retail spaces are being repurposed for alternative uses, such as entertainment venues, fitness centers, or even office and residential spaces, reducing the availability of traditional retail space.
• Retailer Expansion: Certain retail sectors, especially those aligned with consumer trends towards health, wellness, and experiential retail, have seen expansion, further absorbing available space.

Impact on Leasing Activity: The tight market has had a noticeable impact on leasing activity. With fewer available spaces, retailers looking to expand or enter new markets are finding limited options. This scenario has led to a pullback in leasing activity, as retailers may delay expansion plans due to the difficulty in finding suitable locations. Additionally, the competition for prime spaces can lead to increased leasing costs, impacting retailers’ operational budgets.

Rising Rents: The low vacancy rates have naturally led to an increase in rents. Landlords are in a stronger position to command higher rents, especially for well-located properties in high-demand areas. This trend is beneficial for property owners and investors, as it can lead to higher income streams from their retail real estate assets.

Implications for Institutional Investors:

• Investment in High-Demand Areas: For institutional investors, these trends underscore the importance of investing in retail properties in high-demand areas. Properties inthese areas are likely to maintain high occupancy rates and command premium rents.
• Asset Management Strategies: Investors should consider proactive asset management strategies to maintain or increase the value of their retail properties. This approach could include renovations, rebranding, or repositioning of assets to align with current market demands.
• Tenant Mix Optimization: Optimizing the tenant mix to include a balance of recession-proof and growth-oriented businesses can help maintain occupancy levels and attract a steady flow of consumers.

In summary, the current vacancy and rent trends in the U.S. retail real estate market present a mixed bag of challenges and opportunities. The historically low vacancy rates and rising rents indicate a strong market for property owners and investors. However, the consequent pullback in leasing activity suggests a need for strategic asset management and investment approaches. As your strategic partner, we are committed to helping you navigate these trends, ensuring that your investment strategies are well-aligned with the evolving dynamics of the retail real estate market.

Opportunities in Secondaries

The secondary market for real estate private equity interests is becoming increasingly relevant. As institutional investors reassess their portfolios in light of the changing market dynamics, selling interests in the secondary market can be a strategic move. This approach allows investors to reallocate capital more efficiently and capitalize on the current market conditions.

The Role of Strategic Partners

In navigating these complex market conditions, the role of a strategic partner becomes invaluable. A strategic partner can provide the necessary expertise and market insights to help institutional investors make informed decisions about their real estate private equity interests. This includes evaluating current holdings, identifying potential buyers in the secondary market, and executing transactions effectively.

Our Role as Your Strategic Partner

At Lumicre, we specialize in assisting institutional investors in navigating the secondaries market. Our team of experts, well-versed in the nuances of real estate private equity, stands ready to guide you through the process of selling your privately held partnership interests.
How We Can Help

1. Portfolio Assessment: We begin by conducting a thorough assessment of your current portfolio of privately held partnership interests.

2. Market Analysis: Leveraging insights from reports like the CoStar Retail National Report, we analyze market trends and identify potential opportunities for your investments.

3. Strategic Advisory: Our team provides strategic advice on the best course of action, whether it involves holding, selling, or restructuring your interests.

4. Transaction Execution: We facilitate the sale of your interests in the secondary market, ensuring a smooth and efficient transaction process.

If you are an institutional investor looking to navigate the complexities of the current retail real estate market, we invite you to start a conversation with us. Send us a list of your privately held partnership interests, and let us help you unlock their full potential in this dynamic market.

Contact us today to explore how we can be your strategic partner in this journey. Together, we can navigate the evolving landscape of real estate private equity and capitalize on the opportunities that lie within the secondaries market.

Note: This blog post, drawing on the Retail National Report United States released by CoStar Group in August 2023, aims to provide information only. You should not consider it as investment advice.