The pandemic’s devastating impact on the U.S. retail real estate market keeps growing, with bankruptcy and store closings mounting. In the first three quarters of 2020, preliminary data now shows the U.S. retail market recorded 37 million square feet of negative net absorption, the net change in the amount of occupied store space, providing an early indication of what may come in the next several quarters.

With the substantial amount of volatility and uncertainty in the retail market today, investors have largely put a hold on trading assets, cautiously waiting to see how everything plays out. In the five months from March to July, preliminary retail transaction volume in 54 of the largest U.S. markets averaged slightly more than $3 billion per month, half of the monthly average from the beginning of 2019 through February 2020.

The lowest monthly total was recorded in May, when only around $2.2 billion in retail property traded hands. Retail transaction activity was already on the decline before the pandemic began as investor attention had largely shifted to other major property types, namely industrial and multifamily. Now, the pandemic has greatly accelerated that trend.

While recent retail transaction activity has been rather limited, investors are still buying retail properties in smaller numbers. More than 8,600 property sales occurred in the country’s largest metropolitan regions from March through July, signaling that buyer interest remains, albeit at a more subdued level. Taking a closer look at the types of retail properties that have recently sold, two notable, preexisting trends have been substantially accelerated by the pandemic and ongoing recession.

Single-Tenant Net Lease Sales

Historically, single-tenant net lease properties have carried the reputation of being relatively safe, “bond-like” investments as the properties are typically occupied by high-credit tenants with longer lease terms. Now, however, with the pandemic and corresponding lockdown measures inflicting a substantial toll on experiential retail, a sector that is prevalent within this asset class, many single-tenant net lease properties likely carry more risk than they did prior to the pandemic.

Despite this, relative to most other retail property types, single-tenant net lease properties have been significantly less impacted overall. Strictly looking at the public markets, the share prices of Realty Income, W.P. Carey, Spirit Realty and National Retail Properties, four real estate investment trusts that primarily focus on single-tenant net lease ownership, are down 10%-30% since the end of 2019. By contrast, the share prices of three of the largest shopping center and mall owners, Simon Property Group, Tanger Factory Outlets and Macerich, are down by more than 55% over that same period.


Investors within the U.S. retail market were already beginning to shift more of their attention to the single-tenant market in the years leading up to the pandemic. However, due in large part to single-tenant net lease retail holding their value better than other retail asset types, the shift in retail investor focus to this subsector has accelerated.

Prior to the pandemic, from 2017 through February of 2020, single-tenant retail transaction volume accounted for around 41% of the total average retail transaction volume per month. Over the past six months, however, single-tenant deals have comprised 52% of total sales volume, representing a 12-percentage-point increase over the historical average.

The largest single-asset retail deal of the past six months occurred in May of 2020 when Eaton Vance Real Estate Investment Group acquired the 78,750-square-foot Whole Foods net-leased store property in the Lincoln Park submarket of Chicago for $70.9 million, or $900 per square foot. In this time of heightened uncertainty, more retail investors are opting to pursue and acquire these types of retail property over higher-risk shopping centers or malls that may face greater exposure to the threats of the pandemic or the longer-term threat of e-commerce.


Land Value Transactions

Another pre-existing trend within the retail transaction market that has accelerated over the past six months has been the increase in the share of retail property sales in which investors buy the property for its land value.

The operating fundamentals of many of these retail assets are likely beyond repair, and in many cases, opportunistic buyers have determined that redevelopment is the best use. In the 10-year period from 2005 to 2015, the share of trades selling for the value of the land averaged 0.4% per year. However, over the past few years, that share has now climbed to around 1.2%.

Although still a relatively small trend within the commercial real estate market today, retail-to-industrial conversions have become increasingly popular over the past several years as e-commerce growth has greatly accelerated. And many of the recent retail properties that have sold for land value are in above-average industrial locations based on several factors including demographics, density, households, income and traffic.

In fact, the average last-mile industrial location quality score (LQS) of the land-value retail trades through the first half of 2020 was 56, compared to the national average last-mile industrial LQS of 50. The average bulk regional industrial LQS of the land-value trades in the first half of 2020 was an even higher 60, compared to the national average bulk regional industrial score of 50.

As Prologis detailed in a recent research report, retail-to-industrial conversions are complex and can face a multitude of economic, political, physical, and legal challenges, which is a significant reason why the trend remains relatively nascent.

However, for investors able to successfully navigate the challenges that accompany retail-to-industrial conversions, a substantial opportunity exists within the marketplace today to identify poorly performing retail sites in high-quality industrial locations.


Going forward, we expect both these retail transaction trends to continue, as a greater number of investors attempt to minimize their portfolios’ exposure to the threats that the pandemic presents and the longer-term threat from e-commerce.

Robin Trantham is a consultant with CoStar Advisory Services in Boston.

Source: CoStar