Fast Food, Convenience Stores Fuel Retail Investment Surge
Despite a broader slowdown in deal flow across many commercial real estate sectors, the retail market is demonstrating some resilience as investors continue to find pockets of opportunity. According to a new report from Marcus & Millichap, strong performance by fast-food chains and convenience stores is driving investor demand for properties in the sector. Simultaneously, the rapid redevelopment of spaces vacated by major retailers is attracting capital to power and neighborhood centers. This dynamic, coupled with the Federal Reserve continuing to cut interest rates, is creating a favorable environment for retail investment.
Marcus & Millichap reports that consumer spending remains robust, with core retail sales reaching a record high in August and defying economic headwinds. The Federal Reserve's decision to lower interest rates three times this year is expected to further reduce borrowing costs and stimulate consumer demand, boosting retail foot traffic and discretionary income, thereby increasing tenant demand for retail space. The report found that the expansion of national brands, including Freddy's Frozen Custard and Steakburgers, is intensifying competition for net-leased properties, driving pricing for properties with strong fundamentals. Lower borrowing costs, anticipated to continue throughout the year, are likely to further fuel investment activity, even as the broader real estate market cools.
In addition to robust consumer spending, Marcus & Millichap observed a sharp uptick in investment in retail properties, particularly those with established tenants. This includes a variety of sectors, from convenience stores to regional chains, as demand consistently outpaces supply. The influx of capital, particularly for sub-$10 million properties, signals a dynamic shift in the market as more private investors engage in retail asset acquisitions.
Looking ahead, Marcus & Millichap forecasts continued growth in retail investment, driven by the sector's tight vacancy rates, heightened lender activity, and the ongoing impact of lower interest rates. However, the report also cautions that the broader economic landscape remains uncertain. Potential headwinds, such as rising inflation or a sudden economic downturn, could impact consumer spending and, consequently, retail investment activity. Despite these potential challenges, the report concludes that the retail sector is well-positioned for continued growth in the near term, driven by strong consumer demand, favorable financing conditions, and the ongoing redevelopment of retail properties.
Source: GlobeSt/ALM