Retail properties in the US have felt the pain of a seismic shift in consumer behavior, but the asset class will emerge as a bright spot this year, says one of private real estate’s biggest managers.
“Retail [recovery] started earlier; the adjustment, both structural and pricing wise, took place before any other asset class,” Hines Americas’ chief investment officer Alfonso Munk told PERE. “It took the write-downs quicker, years ago before the pandemic – it’s been in restructure mode for years and then obviously, as a result of that, you’ve seen prices being more reasonable.”
There are retail metrics which inform Hines’ more optimistic view of 2024. The national availability rate – current vacancy plus space expected to become available in the future – is set to drop by 20 basis points and finish 2024 at 4.6 percent, per a CBRE report. While rent growth is expected to drop below 2 percent in the first nine months of the year, it is expected to rise above 2 percent in the final quarter of 2024, according to the brokerage. Cities like New York, for example, have already seen significant rent growth through 2023 – rents in Manhattan reached $663 per square foot in the third quarter of last year, marking a 9.2 percent increase in a year.
Plus, soaring construction costs through 2023 are causing a dearth of new retail property development in the year. Overall, there are about 14 million square feet of multi-tenant retail space set to become available in 2024, which will not match what is needed by occupiers, CBRE noted. The broker said that is about half the projected demand.
Delving into retail’s sub sectors, open-air and grocery-anchored retail are expected to see significant interest, Munk said. That is where Hines has focused its efforts in recent years. “Retail space has been one of our favorite asset classes already for the second or third year in a row. We have been mostly active on very narrow but specific type of retail: grocery-anchored, lifestyle placemaking centers, open air, with a lot of focus on entertainment and services,” he said. “As we come out of covid, people want to be outdoors, [and] there’s things that you cannot do through e-commerce.”
In March last year, Hines’ flagship commingled US core-plus fund bought a 262,000-square-foot retail center anchored by Whole Foods in White Plains, New York, for $112 million, the Wall Street Journal reported.
The year before, Hines Global Income Trust bought Waverly Place, a retail center in Cary, North Carolina, again with Whole Foods as the anchor tenant. Munk said Hines is buying a similar asset on the West Coast anchored by Walmart and is on the “continuous lookout” for similar acquisitions.
“We see these assets have a significant amount of improvement potential because not only you’re buying them at a great cap rate, but you can also improve them significantly because there was low-hanging fruit in terms of management,” he said. “We come in, upgrade and refurbish them, increase the rents.”
In terms of geographies, Munk said Hines focused on the Sun Belt states, as well as gateway cities and densely populated metros.
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