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Newmark’s report on net lease transactions in the second quarter of 2024 showed a 14.71% slowdown from the same period in 2023. The dollar volume dropped from $10.74 billion to $8.93 billion, according to the analysis of data from Real Capital Analytics.

Counting the number of transactions rather than the dollar volume showed a 6.49% drop from 832 in 2023 Q2 to 778 this year. That suggests average deals dropped further in the price for the dollar volume to drop faster than the deal number.

Net lease share of total transaction volume was 20.59% in the second quarter of 2024 on a rolling four-quarter average. That’s a 270-basis-point reduction from the same period in 2023. And sale-leaseback as a percentage of total net lease was 16.17% in 2023 Q2 compared with 13.62% in 2024 Q2.

Broken out by property type, industrial went from $5.68 billion sales in 2023 Q2 to $5.07 billion this year, a fall of 10.74%. Retail saw the second biggest drop of 18.22%, from $2.25 billion to $1.84 billion. That was the smallest dollar transaction volume of the three types. Office transaction volume had the biggest fall at 20.47%, moving from $2.54 billion to $2.02 billion.

For the first half year, private investors have been the most active buyers, taking 46.5% of volume. They have been the most active since at least 2018. The second largest was institutional, representing 25.2%. Cross-border was 7.7%, REIT/listed 7.3%, and user/other being 13.3%.

Among sellers, private was 45.6%, institutional was 19.0%, user/other was 18.3%, REIT/listed was 11.3%, and cross-border was 5.8%.

Overall, Q2 was the third-lowest quarter since the opening of 2018. The two worst quarters were 2024 Q1, when the volume was $8.1 billion, and 2023 Q4, with a volume of $8.6%.

In terms of number of transactions, Q2 2024 was the worst over the same period. The second worst was Q1’s 791.

The average cap rate for industrial during the quarter was 6.48%, with retail at 6.60% and office at 6.77%.

According to Newmark, the average spread between blended net lease cap rates and the 10-year Treasury was about 217 basis points in the second quarter, a drop of 28 basis points from 2023 Q2.

 

Source: “Net Lease Transaction Volume Down Nearly 15%”

Retailtainment has become a significant draw for consumers, especially now as many are being more cautious with their spending dollars. According to research from AIScreen, the experience has boosted store visits and sales by 30 percent.

PREIT, which focuses on businesses transforming traditional malls into more innovative districts, is at the forefront of this trend.

In-store shopping isn’t dead
Instead of sitting home and shopping, Joe Aristone, executive vice president and chief revenue officer told GlobeSt that “people are looking to have more social experience.”

“What you’re finding is that retailers are using their physical brick-and-mortar stores to support their online business,” Aristone said.

“So what they’re trying to do is to get consumers, if you are going to buy online, at the minimum, they want you to be able to return goods at the store.”

According to Aristone, retailers have been trying to improve their entertainment offerings to a broader consumer base and get people to stay on their property longer.

“Both of those things are being driven by how we merchandise the assets, the tenants we put in, and entertainment things you can’t necessarily do online to compete with that. And then also to have a really wide offering of retailers,” he said.

Where it works the best
But where is retailtainment working best? Right now, it’s the wealthiest suburbs, according to Aristone. So think Scarsdale, New York, which was ranked by GOBankingRates as the richest area in the country, with typical home value exceeding $1.4 million.

PREIT, which has properties on mainly the East Coast, has a major focus in Philadelphia. In that market, it operates up to 17 percent of entertainment theme concepts.

“If you look at Philadelphia, for instance, Cherry Hill, which is an eastern suburb affluent trade area, is doing very well,” Aristone said, whose firm operates the Cherry Hill Mall.

While he added that urban retail has been a “little softer,” – but he thinks the demand will “come back eventually.”

More about the current state of retail and malls
When speaking about malls in general, Aristone has been seeing higher-quality malls thrive the most.

“I think you’re going to see that the top-tier malls are going to continue to do well, continue to dominate,” he said.

But it’s a different story for lower-tier malls that are classified as C or Ds. He believes those properties might “become obsolete at some point.”

Another thing is, that in Philadelphia, Aristone has noticed that mall retailers are starting to downsize.

“We probably had 18 or so malls that were operating in the (Philadelphia) marketplace. And now we’re down to about, eight or nine,” he noted.

“What’s happening is that tenants are realizing that they don’t need to have a store, eight miles or seven miles away. They can kind of operate more efficiently out of one store.”

Eventually, Aristone thinks its mall portfolio in Philadephia will dwindle to five or six.

Overall, it’s been a strong first half for the retail sector in general, as vacancies in the second quarter hit a 20-year low. However, recently there have been growing concerns about the economy. For the fourth straight month, the unemployment rate has increased and the stock market has taken a hit.

PREIT has been tracking sales from its reported retailers and noticed the demand from those in the fashion space has been “softening.” JCPenney is namely seeing less demand too, according to the firm.

While Aristone sees a “mixed bag” with consumer confidence, he isn’t too concerned right now. He stated the trend is “nothing earth-shattering or alarming to the point where there’s a panic button.”

“I think enough strong enough sales is coming out of enough other categories that we can absorb these trend lines, and it’ll be fine.”

Source: “Inside the Growing Trend of Retailtainment” 

Not all segments of commercial real estate are created equal. Some right now are thriving, while others are struggling to see demand.

Since the onset of the pandemic, life has changed. More Americans are employed remotely or have hybrid schedules to improve their work/life balance. Interestingly, this has resulted in fascinating trends recently.

The retail boom
The improved work/life balance has resulted in more time spent shopping, even with a mass amount of malls and brick-and-mortar stores closing over the past couple of decades. The issue was supply not meeting demand in the space – but now that has reversed with construction and development becoming more scarce, according to Alex Zikakis, CEO and president of Capstone Advisors.

“The best thing for retail reputation and appreciation was people’s understanding of just how valuable and necessary it is, especially having gone through a pandemic and that you still pretty much need physical retail,” he told GlobeSt.

“People need to drive and get their groceries.”

This year, there have been encouraging trends in retail. In March, vacancies were at an all-time low, according to a national report from Marcus & Millichap. Convenience stores and fast food establishments led the way with the lowest inoccupancy rates.

Plus, supermarkets, restaurants, discount stores, and fitness centers all saw significant gains in traffic in the first five months of 2024. The spike ranged from 5.7 percent to 8.9 percent, with discount retailers seeing the highest gains in customers. This is all thanks to consumer’s appetite to spend. Asking rents are expected to jump 2.2 percent in 2024 compared with last year, according to Marcus & Millichap.

‘Rent growth has been solid. Tenant resilience has been high, and you can still buy retail and get positive leverage with debt,” Zikakis said.

He added low cap rates, especially in the near-zero interest rate environment, have not only benefited retail – but the multifamily and industrial sectors as well.

“When debt got super cheap, there was a lot of development in those two asset classes, and what we see by and large is that all new development of big, multifamily and institutional class industrial [properties] has stopped,” Zikakis said.

He added, that “fundamental demand is still, is still solid,” even with an excess of construction in those segments of CRE.

Office sector headlines struggles
But then there’s the office market, which is a different story. The work-from-home trend hasn’t been too kind to the asset class. That has led to a dip in the need for office space. In fact, tenants now need 18 percent less space, which comes out to less than 160 square feet, a Moody’s report found.

Zikakis said that offices with “a lot of difficult commute patterns, high cost of parking and streetscapes that don’t make it conducive to wanting to walk around the streets in some cities, because of homelessness or crime, vagrancy and high vacancies,” are doing the worst.

Also, he said companies that focused on the “burn cash to grow model” are probably having a tough time generally right now operating in the environment. This applies to firms that haven’t generated a profit yet, without positive cash flow.

“That’s been a very difficult space,” Zikakis noted.

“They burn cash until you can hopefully have some big binary event where to get to a big exit, either through an IPO or something, or a strategic sale, but you’re going to burn a lot of money to get there. That’s more attractive for investors when there aren’t a lot of good sort of current income options. When interest rates went up, there became a lot of good current income options.”

Investment strategy for CRE
As an owner and developer in CRE, Zikakis follows whatever the hottest market is. Right now, that’s the Sunbelt area, which includes 18 states such as Florida, Texas, Utah, California, and Arizona.

Zikakis’ philosophy is picking two or three markets and staying put in them.

“We pick two, or three markets for diversification purposes, and then hopefully pick good, durable markets [that] have good demographic attributes to them and good political and regulatory environments,” he said.

“We stay in those markets, and we don’t go jump to a new market that we’re not operating in, simply because we think that, we can find, one or two deals in a hot market.”

He also added that the other important factors when pinpointing an area are the labor market and population. Is there a growing number of Americans migrating to a particular region? And what’s the quality of talent like when it comes to workers?

Going forward, Zikakis said that the office market has some uncertainty. His concern is the recovery will be slow because of the long-term lease commitments, coupled with the lack of renewals, with tenants trying to reduce their footprint.

“You’re on this slow decline of facing issue after issue because your leases slowly roll over right into the building,” he noted.

Zikakis added that it could be a “painful process” to go through, and the office sector could take years to rebound.

No outlook was provided for retail – but he revealed that “improvement allowances are higher than they have ever been.”

“To get to a good, high-quality tenant with a really good concept, you gotta keep your asset current. We are writing bigger checks for those tenants, Zikakis concluded.

Source: “Retail Resurgence Headling Current CRE State”

Short-term-rental supply and demand have both lagged somewhat in the face of higher interest rates and a slowdown in bookings since the Covid-19 pandemic, but the industry could be poised for a rebound.

Growth in supply is slowing compared to a year ago, according to data from AirDNA LLC. The short-term-rental analytics platform reports there were about 1.56 million listings nationally in 2023, up 14.7% from 2022. This year is estimated to have about 1.65 million listings, a more modest 5.8% annual gain in supply.

Demand, meanwhile, is markedly improved from a year ago. It grew 11.4% in May versus May 2023. That compares to a year-over-year decline of 1.8% in May 2023. Year-to-date, demand is about 6.8% higher than last year, according to AirDNA.

Bram Gallagher, director of economics and forecasting at AirDNA, said fewer new listings combined with consumers feeling more certain about the economy will help prop up the short-term-rental sector the rest of this year and into 2025.

“I think 2024 is a turning point for the short-term-rental industry,” he said, adding 2023 saw occupancy drop below pre-pandemic levels and revenue per available room decline by more than 8%. “It was … not a great year for performance, and there was hesitation on the consumer side.”

It was about a year ago a tweet proclaiming an Airbnb collapse went viral, owing to significant RevPAR declines in short-term rentals.

This year, inflation feels more or less under control, Gallagher said, and economists widely expect the Federal Reserve will begin cutting rates this fall.

The short-term-rental market boomed during the pandemic, when office employees became full-time remote workers overnight and travel restrictions limited where people could vacation or spend their money. Short-term-rental demand grew most substantially in 2021 — increasing 18.5% from the prior year — and that same year, occupancy hit 62.2%, compared to 56.5% in 2019. Key financial metrics for the short-term-rental industry — average daily rate and RevPAR — also saw a big bump in 2021, growing 10.8% and 21.3%, respectively, over 2020.

Low mortgage rates during the early years of the pandemic propelled more homebuying, and that included purchases of second homes occasionally rented out on Airbnb or other rental-home platforms.

Since then, demand has waned, but many owners have held onto their rental homes, Gallagher said.

“We’ve got the golden handcuffs idea,” he said. “Maybe you do want to sell it. However, until those mortgage rates go down, you don’t think you’re going to get a great price for it.”

That means a lot of owners have kept their homes on the rental market until they can potentially sell them.

STR listings decline in cities, increase in rural areas

Some U.S. municipalities have begun to crack down on short-term rentals, fueled in large part by concern about how the sector’s growth is impacting local housing affordability.

New York is among the major cities that’ve started more seriously regulating short-term rentals because, the city has argued, the recent boom in short-term rentals has pushed up rents and exacerbated the city’s housing shortage.

Gallagher said in big cities across the country, including New York, supply has decreased dramatically compared to recent years. Listings in large urban cities collectively are expected to increase only 0.3% this year, Gallagher said, and supply is actually expected to decline in many markets.

“The number of listings in large cities or urban areas will probably continue to shrink,” he said.

Conversely, the places seeing the greatest listing growth are small cities and rural areas. Supply in those areas is expected to grow 17.7% this year, on top of 25.6% growth in 2023 and 29.3% growth in 2022.

Destinations like national parks and beaches have proven popular with consumers since the pandemic, a trend that has remained sticky even as pandemic-era restrictions around social distancing and capacity were lifted, Gallagher said.

“Because travel is such a repeat industry, if [consumers] have a good experience, they might try it again and again,” he said, adding a lot of small cities and rural areas have limited hotel inventory, making short-term rentals a popular option among travelers to those locations.

Source: “Short-term rentals reach ‘a turning point’ after 2023 slump”