The retail investment sales market in the Washington, D.C.-Baltimore metro area, just like the rest of the United States, has been detrimentally impacted by COVID-19. Multi-tenant retail investment markets have essentially shut down, sellers and buyers are unable to come to pricing conclusions and most investment opportunities have shifted into urban areas that are experiencing more immediate distress.
As COVID-19 cases continue to spike, and with further tightening of lockdown policy likely forthcoming, this trend will continue as the restaurant and entertainment industry bears the brunt of winter. This will present investors with the opportunity to purchase fundamentally solid urban real estate at a discount as the market for larger shopping centers waits to reset.
Vito Lupo, KLNB
It comes as no surprise that shopping center investment sales are anemic. Over the trailing three months in the D.C.-Baltimore area, there has been a paltry $49 million in sales volume across three transactions for retail centers exceeding $10 million. This compared to $196 million across nine transactions in the same period last year, a 75 percent decrease in volume.
Further, of these transactions, two of them — Bel Air Town Center, purchased by JCR Cos. for $21 million, and Hagerstown Shopping Center, purchased by Washco for $13.2 million — were put under contract pre-pandemic, and the third was sold off-market.
Up from the ashes
Nevertheless, while faint, signs of revival are beginning to show. After a full marketing process in September, Federal Realty has reportedly put under contract Sam’s Park and Shop, a core 50,355-square-foot, Target-anchored center in northwest D.C. Feedback from the investment community also indicates that though marketed deals are few and far between, off-market opportunities are starting to pop-up, primarily for centers that had been fully marketed prior to March.
Owners are beginning to test the waters to see what the appetite is for their retail centers, and demand is high. There are plenty of well-capitalized investors actively looking to acquire recession-proof, Class A centers, as well as Class B or C centers with upside. However, investors are being very selective in the assets they pursue and are underwriting the viability of tenants to a microscopic degree.
A recent survey published by Nareit shows that REIT-owned shopping centers had September rent collections of 82 percent, up from a low of 50 percent in April and May. With rent collections up, and many owners of traditional shopping centers able to cover their debt service obligations, there is not yet significant near-term pressure for sellers to offload their assets at discounted values. This has created a wide bid-ask gap between seller and purchaser value expectations, and until the margin narrows, data points of shopping center transactions will remain low.
Supply-side conditions could not be more different for urban properties. There is currently a historically high number of urban properties on the market. According to CoStar Group, in D.C. alone, there are 96 listings totaling 460,538 square feet for sale compared to 191,006 square feet across 32 listings at the same time last year.
Sales volumes for urban retail properties have also fallen precipitously year-over-year, with few completed transactions in 2020. The cause of this high supply is two-fold: existing listings from early 2020 did not transact and have languished on the market and the turmoil created by COVID-19 has resulted in a glut of property on the market. As with shopping centers, asking prices were at historic highs going into 2020, and until prices start to come down — which trends are now showing — the sales market will languish.
Compared to shopping center operators, owners of urban properties are in a more perilous situation. Deal sizes are generally smaller and thus have higher exposure to one or two major tenants. The retail and entertainment industry in D.C. felt severe economic hardship not only from COVID-19, but also politically related turmoil.
Outlook
Although there is promise, such as a $100 million government-approved recovery grant focusing on hard-hit industries, a COVID-19 vaccine on the horizon and a new presidential administration transferring in, it is still yet to be seen how businesses will survive reduced patronage through the winter months. As owners of these properties face increased financial pressure, they will be forced into sale situations that will provide near-term opportunity for investors to acquire sound urban real estate at a discount to otherwise upward pricing trends.
The shopping center investment market may take longer to kickstart. Eventually, capital events will require shopping center owners to sell assets, and when that time comes, there will be ready buyers waiting to jump in. Deal structures will inevitably look different, but eventually shopping center investment activity will return.
— By Vito Lupo, Retail Investment Sales, KLNB
This article originally appeared in the November 2020 issue of Southeast Real Estate Business.