These might be rocky times for some retailers, but that shouldn't dissuade investors from making long-term plays in retail properties, according to Spencer Levy, head of Americas research at CBRE.
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The retail apocalypse has been significantly exaggerated, Levy said. He told National Real Estate Investor that retail as a market segment, and retail-focused REITs in particular, are not facing extinction.
The negative implication of e-commerce, Levy said, is "the single biggest overwrought story in commercial real estate."
That is despite the 105M SF of retail space that closed in 2017, topping the previous year's total of 76M SF, according to CoStar data. This year, an enormous wave of post-holiday closures during Q1 totaled nearly 80M SF.
Defaults among retailers have spiked, with more to come throughout 2018, Moody's reported recently. Among others, Sears joined the ranks of defaulters.
Even so, according to CBRE, retail real estate metrics remain positive. The company notes that consumer sentiment remains strong and retail sales have recorded healthy growth, with net absorption increasing in Q1. Asking rents have also increased.
Certain types of retail properties are indeed suffering. CBRE reported the gap in performance between prime and non-prime assets is growing, with vacancies and availability rising for Class-B and below properties, while demand remained strong for prime assets in the first quarter of the year.
Some retail assets, such as well-placed strip centers, might look dowdy, but they too count as prime.
As for REITs, Levy said they have been making strategic moves to reduce risk in their retail portfolios.
"REITs have been shedding some of their second-tier, less internet-resistant assets for a long time ... I think that the attractive buying opportunities from a capital markets perspective are in the retail REIT space, in large part because there’s been a tremendous overreaction to the encroachment of the internet."
Investors seem to agree, at least to judge by property valuation. Retail might not be the darling property type among investors it once was — multifamily and then industrial filled that role following the recession — but there is enough interest to keep valuations rising.
CoStar's U.S. retail index rose 2.2% in Q1 and 7.5% compared with the same quarter a year earlier. Retail closures have impacted same-store sales, but retailers are reacting rationally by targeting their less-productive locations for closures.
Demand for strong locations remained robust in Q1, CoStar reports. Its Prime Retail Metros Index advanced by 8.7% in the 12-month period ending in March.
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