Volatile year for net lease retail sector, while shopping center investment activity picks up at year-end 2024
Q4 2024 Single-Tenant Retail
2024 was a year of ups and downs for the single-tenant retail sector. After a promising start in first quarter, investor activity cooled off in subsequent quarters, resulting in a rather lackluster year. The sector posted just $11.3 billion in 2024, falling short of matching the previous year’s performance and resulting in the lowest annual sales volume recorded since 2012.
Net lease retail cap rates have been on the rise, climbing for seven consecutive quarters and jumping 69 basis points from the end of 2023 to the current average of 6.81%. While these increases are in line with broader market trends, they reflect a shift in the way investors are pricing risk. Higher borrowing costs, a dip in 1031 exchange activity and the recalibration of market expectations have all contributed to this upward movement in cap rates.
Private investors and REITs comprised 84% of all single-tenant retail buyers in 2024, while foreign capital has all but disappeared over the last 12 months. International investors dropped from 11% of the net lease retail buyer pool in 2023 to just 1% in 2024. While available net lease inventory levels remain inflated, a shortage of large retail portfolio options could be influencing international buyer activity.
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Q4 2024 Multi-Tenant Retail
The multi-tenant retail sector wrapped up 2024 with notable gains in investment activity during the final quarter. Fourth quarter volume climbed to $12.0 billion, resulting in more than $43.1 billion in annual investment sales volume. While reduced levels of activity in the second and third quarters caused the market to fall short of surpassing 2023’s annual total, fourth quarter momentum bodes well for the sector overall.
Shopping center cap rates experienced a slight uptick in the last three months, rising by three basis points to an average of 7.20%. Over the past year, cap rates for the sector have increased 22 basis points. Investors have placed greater emphasis on tenant credit quality and lease duration, contributing to more stable pricing for well-located centers with strong anchors.
Private investors dominated buyer activity again in 2024, accounting for 63% of multi-tenant retail acquisitions. Their focus has centered on suburban retail centers and community shopping hubs, in addition to unanchored strip centers and freestanding multi-tenant retail. Institutional buyers and REITs represented 16% and 14% of the buyer pool respectively, with much of their activity targeting larger, high-quality centers in growing regional markets and necessity-based shopping centers – trends that align with shifting consumer spending patterns. Foreign investment in the retail sector returned to typical levels, following a year of more robust activity in 2023.
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