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Together with
Good morning. A warm welcome to our 843 new subscribers since last week. In today’s edition, we shed light on the continued resilience of retail despite the hurdles of inflation and rising interest rates. Additionally, PE real estate capital hits a Q2 high at $57bn, soaring past the $46bn avg since ’18.
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Today’s issue is brought to you by LLoyd Jones.
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Market Snapshot
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*Data as of 8/18/2023 market close.
RETAIL REVIVAL
Why Shoppers are Returning to Stores Amidst a Digital Era
WSJ: PHOTO: JUSTIN SULLIVAN/GETTY IMAGES
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Despite the turbulence in commercial real estate, the retail sector in the U.S. remains resilient. This year, retailers are on track to open a net of 1,000 new stores as retail space availability plummets to unprecedented lows.
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Retail resurgence: The decline in retail construction post the 2008-09 financial crisis helped the oversaturated market absorb its existing real estate. Modern retailers have leaned into online sales data and analytics to strategically select store locations. Plus, the anticipated complete takeover of online shopping didn’t quite pan out. As digital-first brands realized the limitations of online customer acquisition, they branched into physical retail, further boosting the sector.
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Remote work’s silver lining: Post-pandemic, shoppers returned in droves to physical stores and dining establishments. Consequently, by mid-August, a staggering 4,500 new store openings were announced, with only 3,500 closures. This retail vibrancy contrasts starkly with the office space market, impacted by the rise of hybrid work models. Notably, suburban shopping centers thrived as remote work prompted more weekday visits to local stores, leading some businesses to shift from city centers to suburban locales.
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A mixed bag for malls: While the retail landscape is generally thriving, not all segments are flourishing. Enclosed, low-tier malls face a challenging environment with the contraction of department stores and a shift of tenants to open-air spaces. Data indicates that two-thirds of the distressed retail property sales this year, amounting to $942M, were mall properties.
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Signs of cooling: There’s a noticeable deceleration in retail investments, evident from the 48% dip in recent deals. But specific segments like dollar stores, spearheaded by giants like Dollar General, are in an aggressive expansion mode. On the flip side, expanding brands, such as Leslie’s and Five Below, find themselves in fierce competition for retail spaces, and companies like Crunch Fitness find the real estate landscape tougher than anticipated.
➥ THE TAKEAWAY
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Zoom out: The belief that online stores would overshadow physical outlets has been recalibrated. In the shifting sands of retail real estate, adaptability, and strategic placement reign supreme, underscoring the continued importance of tangible shopping experiences in our digital age.
TOGETHER WITH LLOYD JONES
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Lloyd Jones presents an exclusive investment opportunity in the booming senior housing market for accredited investors.
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Aviva Country Club Heights is a senior living community nestled in a prime location within Woburn, MA. The property exhibits attractive returns for accredited investors with a projected IRR of 15%* and cash yield of 9%*.
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As an owner and operator, Lloyd Jones not only manages these properties but also shares the risk by putting their own funds in every deal. The result? Lower fees, potentially greater returns, and an extra layer of trust and assurance.
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*Disclosure: This post contains sponsored content. Past performance is not indicative of future results. This information should not be used as a basis for an investor’s decision to invest.
DRY POWDER
Second Quarter Sees Surge in Private Equity Real Estate Fundraising
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Private equity remains bullish on commercial real estate. Preqin’s second-quarter report underscores this with a spike in capital-raising. However, the sector faces challenges. Today, we delve into the key points:
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Remarkable fundraising spike: Spearheaded by the record-breaking Blackstone Real Estate Partners X (BREP X), which garnered $30.4 billion, private equity real estate fundraising surpassed its five-year quarterly average by nearly 24%, amassing $57 billion in Q2 2023.
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Increased competition, slower closures: The number of funds in the market has escalated, reaching 2,183 by June 2023. However, intensified competition and a somewhat challenging environment for commercial real estate resulted in more funds struggling to close. The quarter saw only 82 funds achieve their final close, a decrease from 105 in Q1.
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Extended capital-raising timeframes: Preqin’s analysis indicated a historical shift in 2023, with over 35% of closed-end funds requiring two years to meet their capital-raising targets. Additionally, a mere 22% surpassed their fundraising objectives in the year’s first half, compared to an average of 35% in the preceding five years.
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North American dominance: Funds centered on North American real estate accounted for an impressive 80% of the quarter’s total funds raised. Simultaneously, Preqin’s survey highlighted a growing investor inclination towards value-add real estate opportunities. This changing sentiment is evidenced by the significant $120 billion held by funds dedicated to these strategies.
➥ THE TAKEAWAY
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Strategy shift: The private equity landscape for real estate is experiencing a shift. While the appetite for commercial real estate remains undiminished, new strategies, especially value-add, are garnering more interest.
🌐 AROUND THE WEB
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📖 Read: The remote-worker influx to Colorado’s mountain towns, drawn by its outdoorsy lifestyle, is disrupting the lives of long-time residents.
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▶️ Watch: Despite challenges faced by the commercial real estate sector due to rising borrowing costs and plummeting values, Norway’s $1.4 trillion sovereign wealth fund remains steadfast in its perspective, as stated by CEO Nicolai Tangen.
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🎧️ Listen: San Francisco is set to see more autonomous taxis. But are locals ready to trust driverless rides? WSJ’s Miles Kruppa shares his experience after test-riding two of these vehicles with host Zoe Thomas.
✍️ DAILY PICKS
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Office vacancies soar: Portland’s downtown is facing a grim scenario, with almost 33% of its office spaces empty, posing a dreary future for the city’s commercial real estate industry.
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Crowdfunding controversy: After Nightingale’s CEO Elie Schwartz was accused of misappropriating millions from CrowdStreet investors, competitors are now emphasizing enhanced fraud safeguards.
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Office return doubts grow: Amid declining hopes for full office comebacks, cities consider transforming vacant spaces into housing or labs. Yet, with high costs, minimal progress is being made.
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Positive impact: A NYC architecture firm, celebrated for its unique Manhattan apartment designs, clinched this year’s Cooper Hewitt national design award.
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Bankruptcy bid: Yellow trucking has accepted a $1.3B bid for its North American terminals in bankruptcy, signaling a major industrial property auction in key markets.
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Government tenant: The San Diego Association of Governments preleased 87,000 square feet at the 37-story, $450 million West development in downtown San Diego.
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Rent cuts: The saying “Everything’s bigger in Texas” proves true even for rent reductions, with significant price declines reported this July, as per RealPage.
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Stay on NYSE: WeWork announced a 1-for-40 reverse stock split on Friday to stay listed on the New York Stock Exchange.
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PPP fraud: The Miami agent, accused by the federal government of misusing pandemic relief funds on luxury items including a Bentley and cosmetic procedures, was sentenced to prison.
📈 CHART OF THE DAY
RBC Wealth Management
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