Crow Holdings Capital this week announced a $1.8 billion recapitalization of a retail real estate portfolio in the US. The deal brings a global institution into a portfolio of unanchored strip malls Crow has been amassing since 2015.
The pair are planning to invest a further $300 million of equity to grow the portfolio, too. “Let’s accrete the return by doing more acquisitions [and] driving value through leasing,” Crow’s chief executive Michael Levy told PERE.
Crow and its investors have conviction in this area of the retail sector because they see predictable cashflows driven by properties considered necessary in the communities they serve. Those cashflows have been substantiated by the performance of the two vehicles previously containing the assets. PERE data shows both funds produced north of 9.1 percent returns through the middle of last year.
Transactions and strategies like this have happened largely under the radar given greater general interest in the secular problems of the office sector or widely anticipated price corrections for private real estate’s darling sectors of logistics and residential.
But Crow is adding its brand to a cohort of private real estate market participants that now views parts of the retail real estate market as investible due to their continual relevance to their customers.
Notably, this appetite is ticking up the world over. Preliminary transaction volume for retail globally in Q1 2023 was $16.5 billion, according to data from global brokerage JLL. Approximately $7.1 billion of that was GIC’s purchase of STORE Capital. But, excluding that deal, nearly 40 percent of the $9.4 billion invested in retail properties globally in Q1 was in grocery-anchored or small format retail, according to JLL.
Elsewhere, CBRE’s Q1 Asia Pacific Cap Rate report, published last week, shows a clear bifurcation between appetite for prime shopping malls and high street shops versus secondary retail types like neighborhood malls in that region, too. Around 24 percent of survey respondents received enquiries for prime shopping malls or high street shops in the regions, versus only 15 percent in Q3 2022. Respondents seeing enquiries for neighborhood shopping malls by comparison dropped from 24 percent in Q3 to just 9 percent now.
Expected performance for the asset class is high. According to PREA’s Q1 2023 Consensus Survey of the NCREIF Property Index, total return in retail this year is expected to outperform its peers – a 1.7 percent loss versus 5.4 percent losses for industrial and apartments and 9.1 percent loss in office. Total return expectations in retail per year through 2027, meanwhile, match that of apartments, at 4.9 percent.
It is important not to overlook the fact the aggregate size of the retail real estate market is today considerably smaller. According MSCI Real Assets’ global property index, the sector made up over 30 percent of institutional real estate portfolios at the end of 2013. Now that number has almost halved, standing at 15.68 percent as of the end of last year.
Nonetheless, in the context of a smaller marketplace, industry participants now understand where they stand in terms of which forms of retail are most viable and, subsequently, expect to see a bounce for the sector. If the older concept of institutional-grade retail real estate has indeed died by a thousand cuts – as often it was said – then the birth of a new age of retail property is now a demonstrating another cyclically popular phrase: green shoots.