The pandemic is hitting multi-tenant retail real estate incredibly hard.
In the third quarter, vacancies in multi-tenant properties rose by 40 basis points to 6.4%, according to a special report by Marcus & Millichap.
Unsurprisingly, shopping malls and neighborhood centers detracted from the performance of multi-tenant properties – both of which were up more than 100 basis points year-to-date. Neighborhood centers with food anchors did better than those without. Still, some smaller retailers in these centers had to close during the pandemic.
Marcus & Millichap expects lifestyle centers to recover in a post-pandemic world as smaller retailers replace permanently closed restaurants. Key companies have helped power centers benefit, but some of those traffic gains could be foregone after the pandemic if more options are offered to buyers.
While there are problems for locations with multiple clients, according to Marcus & Millichap, the retail sector should outperform one client. The vacancy rate in individual rental properties rose by 20 basis points to 5.2% in the third quarter, while rents fell.
The strength of an individual tenant is determined by key services such as fast food restaurants with thoroughfares, drug stores and other major retailers. During the pandemic, investors flocked to fast food restaurants, dollar stores and pharmacies, according to the NNN Market Intelligence Report by Chris Pappas, associate director of the Net Lease Division of Marcus & Millichap.
In a previous interview with GlobeSt.com, Pappas stated, "Interest is really focused on the dollar stores, drug stores, and fast-food restaurants that still have the passageways where people can buy groceries."
If big box retailers were allowed to continue operating during the downturn, they also see strong sales, according to Marcus & Millichap.
Despite these sales, some investors and developers are looking to remodel warehouses to take advantage of the logistics sector's higher returns and strong rental growth, according to Stuart Taylor, senior director of retail investments at JLL, in a post on the company's website.
“Prime large format retail locations will continue to be in high demand from retailers. However, as long as logistical trends continue on their current path, there will be pressure to remodel sites that have underutilized land, a secondary mix of tenants, or the site competes with a similar asset in the same area, ”says Taylor.