In 2023, retail transaction volume dropped to $53 billion, marking a roughly 25% decrease from the average over the past decade. However, signs suggest that sales activity may be nearing its lowest point in the current cycle, as the first two months of the year were only 13% below the levels from the same period in 2023.

The capital markets environment today revolves around two main strategies. At different price points in the retail investment market, smaller private investors often pay cash to leverage 1031 tax-deferred exchanges and focus on long-term investments for estate planning purposes. On the other hand, investors who rely heavily on debt markets tend to respond swiftly to macroeconomic factors like rising interest rates, concentrating on large, management-intensive projects, and adjusting their price targets based on their evolving cost of capital and future cash flow projections.

The top end of the market sees a limited number of marketed investment deals, but the sluggish transaction activity is not due to a lack of supply at the lower end. In fact, the number of triple-net listings is increasing as the average time on the market goes up. One reason for the declining sales volume is the mismatch between pricing expectations as builders deliver new pre-leased offerings.

Smaller exchange buyers might be willing to accept going-in yields below short-term treasuries and up to the 6% range, but larger investors need to adjust to a higher cost of capital. Investment sales over $10 million, which had cap rates in the mid-5% range in early 2022, are now more commonly found in the mid-6% to mid7% range in the early months of 2024.

Overall, retail properties have experienced a drop in value, with struggling malls significantly contributing to the double-digit price declines at the top end of the market. Grocery-anchored neighborhood centers, on the other hand, are highly sought after and often command cap rates in the 6% to 7% range, with better quality assets pushing well into the 5% region.

For example, institutional investment manager Nuveen acquired Peachtree Crossing in Atlanta for $21.8 million, or $270/SF, in January 2024. The 80,750-SF grocery-anchored neighborhood center, which traded at a 6.5% cap rate and was 92% occupied, has had The Fresh Market as its anchor tenant for the past 12 years.

Higher up the pricing spectrum, unanchored and open-air shopping centers may see cap rates above 7% and occasionally push into the 8% to 9% range as specific market and quality factors influence each transaction.

In the open-air shopping center segment, Nuveen sold the 1 MSF Fayette Pavilion to 5Rivers CRE, a private buyer from Houston, for $134 million, or $128/SF. The 96%-occupied shopping center, one of the largest retail centers in Georgia, attracts over 8 million visitors a year. Due to the rising cost of financing, the deal fetched an 8% cap rate, typical for transactions in this size range.

As we move through the first quarter of 2024, the $180 billion in retail loans maturing between 2024 and 2026 presents a significant consideration for the market. Lending standards are tight across all lender types, and regional banks are scaling back their pace of originations. This year will also test the U.S. consumer's ability to continue spending. However, the limited new retail construction and historically low availability rates should help limit any potential surge in vacancy rates in the event of a demand pullback

Here are several graphs illustrating the current national commercial retail market in The United States of America: