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Shopping Center Cap Rates Are At Record Lows

Blaine Shopping Center in Blaine, MN

Despite continued competition for customers from online retailers, there's a lot to like about Quantum Real Estate Advisors' Q2 shopping center report. Average rents in primary markets increased 2.5% to $25.71/SF, while vacancy rates dropped 50 bps to 5.6%. Rents rose in all markets, thanks to a 20% drop in shopping center development.

The catalysts for the vacancy rate decrease were increased tenant demand and 18M SF in positive net absorption. Shopping center cap rates are at record lows, with primary markets at 6.65% and secondary markets at 7.2%.

The main negative from the report is a 22% decrease in investment sales volume in Q2, with $17.7B in transaction volume limited by the combo of low cap rates and high asking rents. But that investment sales volume is still an increase from Q1, when brick-and-mortar retailers lost an estimated 16% in sales to online retailers.

There are even signs that grocery-anchored retail may be losing its golden touch. Investment in supermarket-anchored shopping centers dropped 20% in Q2, but it remains the most in-demand investment type.