Back in August 2018, North Carolina-based real estate firm Asana Partners launched its second value-add retail fund, Asana Partners Fund II. When the fund held its final close in April this year, it was oversubscribed to the tune of $800 million, with commitments from institutions including the Los Angeles City Employees’ Retirement System, New Mexico State Investment Council and the South Carolina Retirement System.

The interest in Asana Partners Fund II was likely driven by a perceived overcorrection in retail property prices relative to other property types, according to Marcus & Millichap senior vice-president and national director of retail Scott Holmes.

Prices have come down enough that investment returns on retail properties are looking attractive again, especially compared with other fully priced property types, notes Holmes.
US retail property prices have fallen approximately 15 percent from October 2016 to April 2019, according to research and advisory firm Green Street Advisors’ Commercial Property Price Index. In comparison, industrial and multifamily property index values increased 25 percent and 6 percent, respectively, during the same period.

Though some retail properties like fortress-style malls continue to struggle and many large institutional investors are keen to keep allocations to retail low, the market conditions for retail real estate are stronger than the headlines would lead you to believe, argues Holmes.

Construction remained low following the financial crisis, limiting the supply of new retail real estate. And vacancies left by some failing retailers are quickly being filled by more successful stores looking to expand. Retail properties as a whole in the US are around 95 percent occupied, Holmes says, which is similar to industrial and apartment occupancies nationally.

“The fundraising environment for retail is probably not as challenging as one might think”

Adam Munder
Sterling Organization

Speaking generally on retail real estate fundraising, Nancy Lashine, managing partner and founder at placement agency Park Madison Partners, believes investor interest in retail strategies is likely more nuanced. Many investors found their portfolios under-allocated to retail after focusing heavily on the multifamily or logistics real estate sectors for many years, which could be driving capital commitments to retail strategies. There just have not been many opportunities to invest in retail-specific funds over the last few years, and investors that wanted retail exposure were limited to diversified funds or investment products on the public market, according to Lashine.

Indeed, the number of US retail-specific closed-ended fundraises hit a high in 2013 and 2014, with eight funds closing during both years, according to PERE data. In 2015, only three funds closed, with the number of total closes having remained at five or below since then. Not all retail property investments are equal and many investors still find the sector attractive, according to Adam Munder, principal and chief marketing officer at Sterling Organization. The firm raised $495 million for its fourth retail fund last year, surpassing its $450 million target within 10 months.

Some investors in the fund doubled their commitments from the previous fund, feeling that this was the moment for a contrarian play, explains Munder. “We’ve seen more of the contrarian investors in the last 12 months coming in and saying, ‘[The retail apocalypse] has been so overblown.’ The fundraising environment for retail is probably not as challenging as one might think.”

Quality matters

Despite doom and gloom headlines about the death of brick-and-mortar retail properties, Munder still sees many opportunities, especially around grocery-anchored retail. Finding assets trending below market rents and not compromising on quality or the quality of location is key, he believes, and contrary to market sentiment, when excluding enclosed malls, retail property vacancy is down and rents have been rising over the last five years.
The lack of retail funds on the market has worked in Sterling Organization’s favor. Over the last few years, Munder has observed a decrease in the number of private real estate funds pursuing a US retail strategy. Only a handful of firms have retail-specific funds, and diversified funds in market are typically underweight retail, resulting in less competition for retail property acquisitions.

Though Lashine anticipates more bankruptcies from retailers, she also sees opportunities emerging from the sector’s challenges. The retail property sector is attractive because it is one of the few areas that offers distressed opportunities, but she warns that simply buying cheap product is a fool’s errand.

Brookfield Property Partners chief executive Brian Kingston agrees with Lashine’s sentiment noting that there is a large gap in the market between high-quality and lower-quality retail assets. “Retail isn’t overbuilt, it’s under demolished,” says Kingston, who also holds the opinion that the story around the ‘retail apocalypse’ is overblown and does not apply to high-quality retail properties with the right tenant mix.

While plenty of traditional retail tenants have struggled, those that quickly built out an omnichannel that mixes online sales and in-store sales are succeeding. These successful tenants will want the highest quality properties in good locations that pull in foot traffic, he says.

Those that pursue retail property investments need to curate the tenants, according to Kingston. An office landlord is mildly interested in the tenants’ businesses, but creditworthiness takes center stage. A retail landlord, however, needs to act as a partner to retail tenants by creating the right environment to attract customers.

Lashine, who has been searching for the right retail investment product to take to market for the last two years, explains that investors want to see operating expertise and an ability to rework the tenancy, and concludes that managers need to understand customers, who the right tenants are and whether the tenants can afford to occupy the space.

A few other retail funds have held successful closes in the recent past. One of the most notable was Meyer Bergman in February last year, breaking its fundraising record with a €816 million close for its third fund. This, and the successful fundraises by Asana Partners and Sterling Oganization, indicate that at least some investors have faith in the property type regardless of wider market concerns that e-commerce is eroding brick-and-mortar sales.