As the summer shopping and travel season gets into full swing, the commercial real estate industry is closely watching the flow of revenue into the hard hit retail and hospitality sectors. According to a Q2 2021 Investor Sentiment Report from LightBox, investors and their advisors are seeing promising indicators. This is translating to aggressive pricing for top tier assets in both sectors and predictions of a spike in investment in the second half of 2021 and into 2022.
There remains a lingering sense of caution, however, and a look toward Labor Day when retail and lodging receipts will be tabulated; back-to-work and school plans will be underway; and there likely will be greater clarity concerning vaccination rates and variants. Aggregated, this is keeping significant capital on the sidelines and moving many investors into top tier, low risk assets.
Retail Challenges as Ecommerce Surges
The retail sector is navigating the challenges of ecommerce growth and physical store declines; it also is evaluating new concepts and experiential strategies. Centennial Properties, for example, is moving ahead with plans to transform former Sears stores in suburban Chicago into mixed-use projects — with 303-unit luxury apartments and Main Street retail at Hawthorn Mall in Vernon Hills, IL and a 304-unit luxury apartment project at Fox Valley Mall in Aurora, IL. The focus is on planning the development as an entire campus and creating a master vision to establish the destination and integrate all elements together.
“The pandemic is creating a seismic change in how people spend money and how they entertain themselves. It’s up to us to recreate a retail environment that essentially has been the same for 30 to 40 years,” said Steven Levin, Founder and Chief Executive Officer of Centennial Real Estate, based in Dallas, TX. “The challenge is that you have to look at the property as an entire campus. And, creating a master vision to establish the destination is more difficult in an established mall. It is imperative to own the real estate, not just the parcel; otherwise, it is hard to integrate as a well-designed project.”
Hotel Investment Slows
The report also notes that the hotel sector is embracing the surge from almost unparalleled “emerging from the pandemic” Spring and Summer travel activity. Yet industry experts are more than anxiously awaiting the return of the all-important business and convention travelers. And, there is a general consensus that a broader recovery will require an expansion beyond the ultra-safe assets into the wider pool of middle and lower tiered properties.
“The commercial real estate industry is skillfully navigating a complex set of challenges while at the same time seeing many positive signs of recovery and renewal at mid-year 2021,” said Tina Lichens, Senior Vice President, Broker Operations, LightBox. “The retail and hospitality sectors are poised for continued growth and transformation yet are also the most vulnerable to continued upsets as the market stabilizes and investors make decisions about which asset classes can deliver strong long-term returns.”
Among the key findings of the Q2 2021 Retail and Hotel Investor Sentiment Report are:
- Omnichannel retail will drive retail growth — as consumers drive a need for quick and efficient ways to shop online, in-store, or through technology.
- Bricks and mortar retail is expected to grow in 2021 — given consumers’ desire to return to in-store shopping and socialization. Some predict a tipping point where ecommerce expansion slows and in-store retail expands.
- The retail investor profile has shifted. Private investors, high net worth individuals and non- traded REITs are the primary deal makers, with institutional capital waiting on the sidelines.
- Grocery anchored and lifestyle centers remain at the top of the list for investors. Those with good population density, high-income levels and some evidence of supply constraint are particularly in demand and are commanding lower cap rates. Strong shopping center assets are being bid up very aggressively, with pricing that is similar to pre-pandemic levels.
- Resort and leisure travel is back but business and convention travel is key to a strong recovery.
- All eyes are on Labor Day as a critical timeframe for understanding which hotel properties and investors can be called survivors.
- Sales are expected to spike significantly in the second half of 2021, potentially reaching pre- pandemic levels in 2022 and 2023. Many buyers will focus first on properties that can benefit from leisure travel, particularly those in driving distance of large population pools.
- Hotel distress statistics are potentially misleading. More hotels than any other property type are in the distress pipeline, through a transfer to special servicers. Yet looking ahead, the stat does not evoke widespread concern, as many believe that lenders have little desire to take over low performing assets.