Where are Opportunities in Retail Today?

Posted on August 7, 2018

The recent rally in net operating income (NOI) growth reflects stable property fundamentals and improving financial metrics across retail facilities in CMBS. Research by Trepp shows consistent underlying growth in reported NOI and occupancy rates, with NOI netting annual gains and average occupancy rates for major cities and property subtypes surpassing 90%.

Factors contributing to the improved conditions include up-and-coming retail brands, coupled with the trend toward more diverse tenant profiles, which is creating opportunities for new players with unique product offerings, notes Trepp’s Catherine Liu. She writes, “Retail CMBS properties across emerging U.S. markets have posted consistent year-over-year NOI growth in the years immediately preceding and following the recent financial crisis.”

Trepp data shows overall retail NOI levels have been on an upward trajectory since 2011, albeit at a much slower pace. Average retail NOI growth decelerated from 2.19% in 2014, to 1.99% and 1.15% in 2016 and 2017, respectively. Meanwhile, retail occupancy figures have steadily recouped to levels slightly below pre-recession prime, though are showing signs of peaking, points out Liu.

While average retail vacancy stats are still trending below the national average for all CRE property types, planned store closures in the pipeline, weakening demand, and high asking rents are expected to place more pressure on shopping center operators.

Average occupancy growth for retail CMBS reached 1.43% year over year, while the national average tied to all property types declined by 1.54%. Liu cautions that the numbers may not capture properties severely underwater, since often times owners cease reporting financials ahead of anticipated losses.

Trepp reports among the top 20 largest metropolitan areas, the Miami-Fort Lauderdale, Houston and Los Angeles-Long Beach MSAs headline NOI growth for retail properties behind securitized mortgages. Dense populations and stable growth potential is driving strong CRE investment activity in these gateway cities.