Retail transaction volume fell to about $50 billion in 2023. When pitted against the decade-long trend, last year's initial sales estimates signify a decline of approximately 25%. Notably, in contrast to historical accelerations in transaction activity each year, 2023 investment activity shuffled sideways, with each quarter contributing roughly $13 billion to the annual total.

Among the varying price points in the retail investment market, two major strategies characterize today's capital markets environment. On the one hand, smaller private investors pay all cash to take advantage of 1031 taxdeferred exchanges and tend to focus on long-term investments with estate planning goals in mind. They prefer assets with little hands-on management, and the ebb and flow of the debt markets have a muffled but delayed impact. This cohort often buys single-tenant net-leased properties valued at just a few million dollars.

Conversely, those more heavily reliant on the debt markets are more prone to react quickly to macroeconomic variables like rising interest rates. These investors focus on large, management-intensive projects and adjust price targets to reflect their changing cost of capital and future cash flow projections. Notably, a broader market view causes these capital allocators to react to relative perceptions of risk across property types. The combination of no new supply, all-time low vacancies, and the mark-to-market story around inplace rents continue to pull capital into the retail sector.

The number of marketed investment deals at the top end is still limited, but sluggish transaction activity is not due to a lack of supply at the low end of the market. In fact, the number of triple-net listings is growing as the average time on the market rises. One of the contributing factors to falling sales volume is mismatched pricing expectations as builders deliver new pre-leased offerings. The typical bid-ask spread for investment sales under $3 million stood at around 9% in through the third quarter of 2023.

While smaller exchange buyers might accept going-in yields that are below short-term treasuries, larger investors must adapt to a higher cost of capital. Investment sales over $10 million, which saw cap rates in the mid-5% range in early 2022, have risen into the 6% to 7% bracket as of the fourth quarter of 2023.

Broadly speaking, retail properties have seen a dip in value, but struggling malls heavily influence the double digit price declines across the top end of the market. Grocery-anchored neighborhood centers are highly sought after and often fetch cap rates in the low 6% range, with better quality assets pushing well into the 5% region. At the other end of the pricing spectrum, unanchored retail strip centers and large power centers may see pricing above 7%, which can occasionally push into the 8% to 9% range as specific market and quality factors influence each transaction.

As an illustration of the disparate range of cap rates in the retail space, a local buyer, SJ Amoroso Properties, traded into Strawflower Village in Half Moon Bay, CA, south of San Francisco, at a 5.4% cap rate in November. Total consideration for the asset came in at $34 million, or $430/SF. The 78,940-square-foot, grocery-anchored center was 96% leased and featured a 33,000-squarefoot lease with Safeway.

In the unanchored retail space, another private buyer traded into Oracle Wetmore in Tucson, AZ, for $25.5 million, or $264/SF. Acacia Real Estate Group priced the 96,634-square-foot power center at a 7.5% cap rate. The 2005-built project was 100% leased and included PetSmart, World Market, Jo-Ann Fabric and Craft Stores, and ULTA Beauty.

As we make our way through the first quarter of 2024, the $164 billion in retail loans maturing between 2024 and 2026 offer the market a lot to consider. Banks hold approximately 50%, and CMBS investors carry an added 27%. Lending standards are tight across all lender types, and regional banks are pulling back from their once rapid pace of originations. The new year will also test the U.S. consumer's ability to keep spending, and fortunately, a lack of new retail construction and historically low availability rates should put a ceiling on how high vacancy rates climb in the event of a demand pullback.

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