/perspectives/sector-views/cre-where-to-shop-for-us-retail-property

Commercial Real Estate: Where to Shop for U.S. Retail Property Investments

We see value in neighborhood retail properties, particularly in markets that have seen inbound population migration.

February 22, 2023


This Commercial Real Estate sector report is excerpted from the First Quarter 2023 Fixed-Income Sector Views.

Nearly three years after the massive wave of COVID-related retail store closures, demand for retail space has recovered to pre-pandemic levels, evidenced by rising net absorption and declining vacancies. The sector is seeing a divergence of performance, however, with small and medium-sized centers and free-standing properties seeing strong demand, while malls continue to struggle to attract tenants.

Retail vacancy rates fell to 4.2 percent at the end of 2022, according to Cushman & Wakefield, the lowest level on record. Strong fundamentals supported the sector: Development of new retail properties slowed during the pandemic and has remained depressed, retailers opened more stores in 2022 than they closed, and owners have demolished over 130 million square feet of dated retail properties over the past five years. We expect that challenging debt markets and increased construction costs will continue to deter new development. Over 85 percent of the new space that opened in late 2022 was pre-leased, indicating that developers and their lenders have avoided new speculative development that could lead to an oversupply of available space, a lesson learned from the Global Financial Crisis. As a result, demand for space remains strong and retail rents have increased. Although transaction volume moderated in the latter half of 2022, the retail sector saw a lot of properties trade as buyers had access to capital.

We expect the retail real estate sector to face some headwinds with continued inflation, increased debt costs, and potential for a broader market recession. However, we continue to see value in neighborhood retail properties, particularly in markets that have seen inbound population migration, such as the Sun Belt. These properties are benefiting from increased demand beyond traditional retail tenants, including consumer and experiential services, such as medical, entertainment, fitness, and dining. In 2022, experiential tenants nearly doubled their share of historical new leasing activity. With new construction starts expected to remain below historical levels in the near term, we anticipate vacancy rates will remain low and support continued growth in rents and property prices.

U.S. Retail: Net Absorption, Net Deliveries, and Vacancy Rates Improved

Retail vacancy rates fell to 4.2 percent at the end of 2022, according to Cushman & Wakefield, the lowest level on record, as strong fundamentals supported the sector.

U.S. Retail: Net Absorption, Net Deliveries, and Vacancy Rates Improved

Source: Guggenheim Investments, Cushman & Wakefield. Data as of 1.16.2023.

—By Jennifer A. Marler and Farris Hughes

 
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This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Investments in real estate securities are subject to the same risks as direct investments in real estate, which is particularly sensitive to economic downturns.

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Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors.

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