If I told you that the sales of multi-tenant retail properties continued to get stronger throughout Covid, would you believe me? No? That’s ok, I wouldn’t believe that either. Here’s the reality, year over year, retail sales have continued to get stronger and stronger, according to research pulled from CoStar. Let’s examine the transactions for multi-tenant retail properties 50,000 SF and under since 2018.
Beginning with 2018, there were 1,276 transactions with an average price of approximately $4,250,000, which averaged $185 PSF (“Price Per Square Foot”) and a 7.38% cap rate. In 2019 there was a nominal dip in transactions, down to 1,254 for an approximate 1.72% decrease, however, pricing increased to $4,300,000. Where things get interesting is that price PSF decreased to $183/SF and cap rates went up by a slim margin to 7.69% for an approximate 4% increase.
Here’s where everything changes….2020. The year of Covid. If you remember, like I do, it was St. Patrick’s Day. That was the day that all of the deals I had under contract fell through. Everything and everyone seized up and put their pencils down and checkbooks away. Or so it seemed. In 2020, transactions jumped to 1,294, an approximate 3.2% increase. There was a definite decrease in pricing, which dropped down to $3,400,000. For properties that are under 50,000 SF, this is a large decline in pricing. The PSF dropped significantly down to $160 PSF, but interestingly enough, cap rates dropped to 7.38% as well. Not a great year if you were a seller of multi-tenant retail assets. To further add to the difficult year, we saw tenants close their doors. Vacancy rates climbed as businesses were forced to either shut down for good or were restricted as to how many customers at one time were allowed indoors. Restaurants were forced to pivot from no indoor dining to having a curbside pick-up option if they didn’t already have a drive-thru or delivery service. The consumer began online shopping, which forced retailers to evolve and add some form of online shopping to their platforms if they did not already offer this. Eventually, things improved, vaccines rolled out and Covid related numbers decreased, which allowed businesses to begin opening and focus on bringing back the customer. This gave investors and lenders much delight and a slow regain of confidence in this asset class.
Halfway through 2021 we have seen a really nice bounce back and market correction. So far, we have seen almost 1,100 transactions this year, which, if this pace keeps up, it will surpass the levels we saw in 2018, 2019, and 2020. The average price for these assets is just under $3,100,000. The price PSF has jumped drastically back up to $188 PSF, and cap rates have dropped down to 7.12%. At Quantum Real Estate Advisors, Inc. we have experienced these trends. We have recently completed investment sales in Fort Wayne, IN, Merrillville, IN, Albuquerque, NM, Libertyville, IL, and Vernon Hills, IL, to name a few. All of these assets fit the criteria spoken about above. We experienced the highs, and then re-trades of each deal during the lows, but ultimately were able to close these transactions.
So what does this all mean? It shows us that sales are still robust for this asset class. Even though the turmoil of tenants closing, tenants not paying rent, or Landlord’s having to give relief to tenants, there remains a steadfast level of interest in this type of investment property. There are investors who like to collect a monthly check from a single-tenant net-leased asset and not have to worry about management, but there are equally as many property owners who feel safer owning a multi-tenant property for several reasons, tenant diversification being one of them. Their logic is simple…if you lose your single-tenant, you lose all your cash flow. Whereas with a multi-tenant property, you can lose a tenant yet still have some cash flow. Even if the cash flow is significantly reduced, some view that as better than losing all of it. This is an obvious risk-mitigate these investors enjoy.
The most important tool to have is patience. If you have been in this business for a while, you know that change always happens. Examine your strategy deeper. Maybe instead of a 2-year hold, you make it a 5-year hold to try and offset some losses. The one thing that we all know is that every low tends to rebound. Sometimes the rebound is even greater than it was prior to the decline.
