Investors Have Eagerly Followed the Return of Shoppers Back to Stores

With vaccines in arms and trillions of dollars in hands, consumers have returned to stores in resounding fashion this year, and investors have taken notice.
More than $32.5 billion of retail property sales were recorded during the third quarter as growing confidence in the retail sector and rock-bottom interest rates fueled transactions. This quarterly total is expected to rise further as additional deals that occurred at the end of the quarter are recorded, but as it stands, the third quarter of 2021 posted the highest level of retail sales volume recorded in one quarter since 2018.

The reopening of the economy to pent-up consumers with record levels of disposable income ushered in a sharp rebound in retail sales, not just online but in brick-and-mortar stores as well. The best barometer for the health of stores is same-store sales growth, and many retailers are reporting robust figures in recent earnings reports. Best Buy, Target, Walmart and Macy’s were just a few of the many retailers that reported strong same-store sales growth in the second quarter, not just relative to the pandemic-depressed environment of 2020 but also compared to the same period in 2019 as well.
In another sign that the physical retail environment is healing from the pandemic, numerous retailers and large shopping center real estate investment trusts have noted that foot traffic at many centers has returned to pre-pandemic levels. Couple the improving performance and sentiment surrounding the retail environment with attractive yield spreads and investors awash with cash, and you have a recipe for a very active deal environment.
While investors continued to heavily target single-tenant, net-lease deals with credit tenants in the third quarter, there are signs of increased risk tolerance. After accounting for less than 45% of total volume between the second quarter of 2020 and the first quarter of 2021, sales of multitenant retail assets increased during the second and third quarters of 2021 to 48.5% and 50.2%, respectively.

Investors targeting grocery-anchored centers to avoid e-commerce disruption has been a multiyear trend in retail investment that precedes the pandemic. However, there has been a pronounced uptick in the sales of nongrocery-anchored shopping strips and regional shopping centers, indicating investors are feeling more comfortable with near-term leasing prospects in those centers.
Also contributing to the heightened retail sales volume during the third quarter was Kimco Realty’s acquisition of Weingarten Realty’s portfolio in August. The two shopping center-focused real estate investment trusts merged in a nearly $3.9 billion transaction, with the combined entity retaining the Kimco Realty Corp. name. The transaction included a portfolio of 159 open-air shopping centers and mixed-use assets with 30 million square feet of gross leasable area primarily located in high-growth Sun Belt markets.
Given the current dichotomy in pricing of private versus public retail real estate, it is likely other retail REITs will turn to mergers or privatization to unlock shareholder value. Just last month, Cedar Realty Trust’s board said it is reviewing strategic alternatives as it weighs a possible sale of its 9 million-square-foot portfolio of grocery-anchored and mixed-use properties. In addition, the executive management teams of numerous other retail-focused REITs have publicly lamented the gaps between public and private valuations, suggesting more strategic reviews are likely forthcoming — that is, so long as both shoppers and investors continue to spend.