Retail product within the suburban New York tri-state market, including New Jersey, has maintained its dominance as a highly sought-after product type, given a historically limited construction pipeline and high occupancy rates. This has translated to notable rent growth across the region and nationally. As a result, there is ample liquidity and a deep pool of buyers chasing the full-range of retail property types, including grocery-anchored properties, power centers, strip centers and large regional malls.
Presently, private buyers comprise approximately 80% of the retail buyer pool nationwide. These investors are bidding aggressively as institutional groups, such as pension fund advisers and real estate investment trusts, take a more patient approach and pursue strategic one-off acquisitions, and corporate mergers & acquisitions activity increases with Kimco Realty’s acquisition of RPT Realty and Regency Centers’ acquisition of Urstadt Biddle Properties, given the recent volatility within the debt markets. In addition to conventional retail investors, the buyer pool has been augmented via buyers from other sectors, most notably suburban office due to the lack of transaction volume post pandemic.
While the Northeast real estate market has historically trailed the Southeast and Southwest in terms of retail investment activity, it is quickly catching up as buyers look to increase their market share and chase superior yields in a geography that offers strong demographics via the high affluence and dense population.
As with all real estate segments and geographies, however, the rapid uptick in interest rates enacted by the Federal Reserve to counteract inflationary pressures has created a lack of transparency and an overall decline in deal activity over the past 12-18 months. The economic uncertainty has undoubtedly affected how and when sellers bring their property to market.
While year-over-year transaction volume is down by approximately 60%, there are positive indications for 2024 and beyond due to the significant dry powder that has been raised for retail. On the equity side, grocery-anchored retail centers continue to be a favored investment strategy due to their essential nature and “pandemic proof” in-line necessity retail. Additionally, unanchored strip retail investments have become one of the most heavily transacted product types as buyers gravitate towards more “bite-size” deals with private credit tenancy and more immediate value creation opportunities given lease durations are generally shorter. Finally, regional malls, such as Brunswick Square in East Brunswick and Broadway Commons in Hicksville, Long Island, are garnering significant investor interest due to their opportunistic profile and ability to create mixed-use environments by adding experiential tenancy and apartment/townhome options.
On the debt side, life insurance companies are a significant source of retail financing, particularly for grocery-anchored shopping centers, and are expected to have fresh allocations for 2024. Regional banks are expected to remain functioning in the space, and money center banks have also been active through commercial mortgage-backed security programs. Heading into next year, increased demand from overseas investors for Treasuries, especially in the U.K. and Europe, is expected to compress interest rates, reduce retail financing costs and create more competition within the market. However, with the 10-year Treasury rate dropping from a high of approximately 5% in mid-October to the current level of roughly 4.3% at the time of this article, more attractive financing rates are currently being achieved.
Moreover, improved capital markets liquidity will complement the sound market fundamentals on the leasing side, as limited new construction is planned or underway and the vast majority of new product consisting of single tenant build-to-suits. As a result, any vacancy within the market is absorbed rapidly and at premium rents. This is particularly evident with vacancies created through bankruptcies such as Bed Bath & Beyond, which are often found in high-demand areas and offer a significant mark-to-market, as many of these leases were tied to longer terms and negotiated decades ago. Retail owners are in a favorable negotiating position and achieving higher rents, especially considering the supply shortfall.
In fact, retail vacancy within the suburban New York tri-state area is at an all-time low. According to JLL research, there is now less shopping space for lease than in any other time since before the Great Recession of 2008.
While uncertain economic conditions will continue to create some instability within the capital markets, ample liquidity from equity and debt providers chasing retail product, as well as the strengthening fundamentals in the form of growing tenant demand and low inventory within the suburban tri-state market, will continue to draw investor interest for the remainder of the year and into 2024.
Kevin O’Hearn is senior managing director and J.B. Bruno is director with JLL Capital Markets.