Retail Could Return — But First It Has To Navigate The First Half Of 2023

In a stormy environment that has commercial real estate professionals scanning the horizon for positive signs, the long-adrift retail sector fired off a flare late in 2022 that could indicate the beginnings of a resurgence.

Fourth-quarter data collected from approximately 73,000 brokers active on the LightBox RCM platform revealed a rise in the number of confidentiality agreements filed per retail deal. Tina Lichens, senior vice president of broker solutions at LightBox, said this unexpected finding suggests there is renewed interest in a sector battered by store closings and growing competition from e-commerce.

“The average number of CAs filed for a retail asset on our platform in a given quarter is more than 70, but in 2022, the number was over 80,” Lichens said. “That was a surprise, and I think it speaks to the strength of triple-net lease deals and maybe some luxury retail properties that are performing well, as well as the appeal of experiential retail.”

Despite these positive figures, listing volumes declined, according to LightBox RCM data. But to Lichens, the findings suggest some people are taking a new look at a sector that has struggled in recent years.

This might be because retailers have had time to reassess strategies and hone their core competencies.

“In a sense, retail has had a head start on regaining the equilibrium between buyers and sellers compared to other asset classes,” she said. “After all, they've been dealing with disruption for several years, and I think retail might be ahead of the game in terms of narrowing the bid-ask spread between buyers and sellers.”

Others, too, see positive signs in retail, with Cushman & Wakefield reporting that U.S. retail vacancies reached a new low in Q4. But whether the sector will maintain its momentum in 2023 remains an open question, particularly as Lichens and others expect continued choppy waters through the first half of the year.

“I’m sure we’ll see more surprises as the year unfolds,” she said. “The general consensus of folks we talk to is that the volume of transactions will continue to be down and the first half of the year is not going to be pretty.”

Lichens is cautiously optimistic about the second half of the year. She said many expect that interest rates will have stabilized by then, and cautious investors and lenders will be tempted back from the sidelines after being spooked by rising interest rates and talk of a recession.

During the “are we or aren’t we” debate of the past year or so, Lichens hasn't been one to shy away from using the R-word. But she is hopeful normalcy will begin to return later in the year.

“I feel like we've been in a recession for a while, actually,” she said. “Let's just all admit that whether we call it a recession or not, we're not in a great place.”

Yet eventually, these challenges will abate. Lichens said now is the time for CRE players to position themselves for the inevitable recovery and return to normalcy.

Of course, she said, what is normal in coming years might look a little different from the pre-pandemic normal.

“The smart people are already thinking about how to be creative in terms of deal-making, of how to rebrand or reposition their business,” she said. “A lot is going to change over the next 12 to 18 months, and I think the world is going to look very different, especially here in the U.S., over that time frame.”

Lichens said she is confident that CRE professionals are capable of preparing for the new normal — whatever it turns out to be. During the Great Recession of 2007-2009, many brokers adjusted to their new landscape by transitioning from investment sales to loan sales, she said. 

A similar fleet-footed approach might be called for now, with Lichens and others anticipating an increase in distressed properties in 2023, particularly in the office sector.

She said that of LightBox RCM’s database of more than 83,000 buyers, about 7,000 recently updated their acquisition criteria to include buying loans.

“They're preparing for the distressed-type environment that we think we're headed to because buying the loan is the way to get control of the property,” Lichens said. “We'll see how that pans out. But both on the investment and brokerage sides, people are ready to pivot.” 

In the meantime, multifamily, industrial and life sciences continue to produce better returns relative to other asset classes. Lichens said she works out of a building that was converted to house light industrial and office tenants and that others in CRE might consider similarly creative solutions. 

“I've been part of the CRE business for a couple of decades now, and I'm continually impressed at how creative people are in terms of how they think about things and how quickly they can pivot their strategies,” she said. “It's almost like turning on and off a spigot.”

This article was produced in collaboration between LightBox and Studio B. Bisnow news staff was not involved in the production of this content.

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