Retail Space Squeeze Sparks Landlord Success: Why Investors Should Take Notice

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Retail Real Estate Thrives Amid Market Turmoil

As the retail landscape shifts, savvy real estate investors are finding unexpected opportunities in a tight market. The latest U.S. Retail Market Dynamics report from commercial real estate firm JLL reveals a thriving sector for retail real estate investors. With a notable 75.4% increase in net absorption quarter over quarter and a 20% decrease in tenant move-outs since 2021, landlords are wielding increased pricing power and control.

Demand Outpaces Supply in Retail Real Estate

Despite facing a tumultuous period marked by store closures outnumbering openings for the first time in two years, retail real estate remains robust. This trend is underscored by CoStar’s report which indicates that national retail vacancy rates hold steady at a healthy 4.1%. Brandon Svec from CoStar emphasizes that this isn’t a repeat of pandemic-era challenges; rather, the imbalance between retail space demand and supply persists, highlighting ongoing interest from tenants across various sectors.

The tight supply is a direct result of record-low construction starts, which are down nearly 21%. This restrained supply, coupled with high interest rates and a challenging funding environment, shields retail properties from more severe market disruptions. As retailers grapple with economic pressures, the lack of new construction helps stabilize the market.

Vacancy Rates: A Sector-Specific Breakdown

The JLL report provides a nuanced view of vacancy rates across different retail types. Malls face the highest vacancy rate at 8.7%, while strip centers hold a 4.6% vacancy rate, and general retail spaces enjoy a remarkably low 2.5%. The report also notes a wave of closures among major pharmacy chains like Walgreens and CVS, which may open up prime free-standing retail locations for new tenants.

Discount retailer Dollar Tree has been notably active, expanding its footprint by securing 170 leases from the closure of 99 Cents Only stores. Quick-service restaurants such as Jersey Mike's, Starbucks, and Wingstop have also increased their presence, indicating robust demand in the sector.

Retail REITs: A Solid Investment

Retail real estate investment trusts (REITs) are reaping the benefits of the current market conditions. As of July 31, retail REITs reported total returns of 7.63% for the year, coupled with a dividend yield of 4.78%. This performance reinforces the investment potential in firms like Realty Income (NYSE: O) and NNN REIT (NYSE: NNN), which focus on free-standing retail properties.

For those considering private investment opportunities, companies like First National Realty Partners offer attractive options. Specializing in grocery-anchored retail properties across the U.S., they provide quarterly returns and opportunities for accredited investors.

Navigating the High-Yield Terrain

In today’s high-interest-rate environment, income-seeking investors have compelling opportunities beyond traditional dividend stocks. Private market real estate investments are particularly appealing, offering substantial yields. The Ascent Income Fund from EquityMultiple, for example, targets stable income from senior commercial real estate debt positions with a historical distribution yield of 12.1%. With a reduced minimum investment of $5,000 for first-time investors, it presents an enticing option for those looking to capitalize on high-yield opportunities.

Final Thoughts

The current retail space squeeze presents a unique landscape for investors, characterized by high demand, low supply, and evolving consumer behavior. As retail continues to adapt, those who stay informed and agile can navigate these changes to secure lucrative investment opportunities.