Retail Real Estate – A Standout Asset Class
February is the month of strategic planning and is the ideal time to focus on investment avenues for the year for long-term gains. Retail real estate stands out as a resilient and lucrative investment opportunity for 2025. With consumer spending on the rise and strong market fundamentals, retail real estate offers investors a unique combination of stability, growth, and diversification.
2024 marked a turn point for retail real estate, providing it with positive momentum for 2025, particularly in price growth and individual asset sales. Investor sentiment has improved as rental income hit record levels, property fundamentals strengthened, and price growth achieving one of the strongest increases across all sectors, even surpassing industrial. With cap rates stabilizing and interest rates moderating it’s heavily anticipated that retail real estate will see bolstered transaction volumes and investor activity in 2025.
Whether you own single-tenant properties or multi-tenant centers, the retail sector is thriving. From the sunbelt markets to the resurgence of experiential and essential retail, now is the time to capitalize on the shifting retail landscape.
Let’s explore why retail real estate is a smart move for the prosperous year ahead!
The Case for Retail Real Estate
- Stable, Predictable Income
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- Single-Tenant Properties
- Extended leases, reducing re-leasing risks
- Corporate-backed leases
- Long-term leases with fixed rental rates
- Multi-Tenant Centers:
- Diversified income sources
- Reduced financial impact of vacancies or tenant defaults
- Risk spread across various tenants
- Easy backfills due to established foot traffic
- Single-Tenant Properties
- Protection Against Inflation/Mitigation of landlord risk
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- Retail leases often include rent escalation clauses, which adjust rents over time to keep pace with inflation, ensuring income growth even as costs rise.
- Many retail leases are structured as NNN (Triple Net) leases, where tenants are responsible for property maintenance, repairs, insurance, and taxes.
- Diversification Benefits
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- Variety of Tenant Types: Retail properties host a wide range of tenants, including grocery stores, restaurants, clothing stores, service providers, and entertainment venues. This variety reduces reliance on any single industry or tenant, mitigating risks and while trends evolve, brick-and-mortar locations remain essential.
- Geographic Flexibility: Retail properties are located across different regions and markets, allowing investors to diversify geographically. This reduces exposure to economic challenges that may impact specific cities or regions.
- Exposure to Consumer Trends: Retail investments offer exposure to long-term trends like urbanization, e-commerce integration, and experiential retail. Adapting to changing consumer preferences can enhance growth potential and diversify income streams.
Single vs. Multi-Tenant Investments: Which Is Right for You?
| Factor | Single-Tenant (ST) | Multi-Tenant (MT) |
| Risk |
Low/High |
Low
Diversified risk across multiple tenants. |
| Management | Low
Minimal due to net lease structure |
Medium
Active management required |
| Income Potential | Medium
Predictable but limited to one tenant, lease renewals every 10 to 25 years |
High
High income potential from multiple tenants with leases restructuring every 1-10 years. |
| Vacancy Impact | High
Vacant loss if tenant leaves |
Low
Lower impact, as income continues from other tenants, with easier backfilling for smaller spaces. |
| Value-Add Potential | Low
Very Limited |
High
Property upgrades or tenant repositioning |
2025 Retail Real Estate Trends to Watch
- Growth in Markets: On average, retail markets demonstrated 1.6% inventory leased, 4.6% availability, 2.3% rent growth, a -6.5% change in sales volume, and a 5.8% total return.
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- Phoenix led the way with 2.5% inventory leased, 4.9% availability, 7.0% rent growth, a 6.0% sales volume increase, and a 9.8% total return.
- Orlando followed closely, showing 1.6% inventory leased, 3.9% availability, 4.5% rent growth, a 7.0% sales volume rise, and an 8.9% return.
- Las Vegas ranked third with 2.2% inventory leased, 5.3% availability, 4.7% rent growth, a 5.4% sales volume increase, and a 7.8% return.
- Atlanta posted a 9% return, with 1.4% inventory leased, 3.9% availability, and 8.2% sales growth.
- Columbus, the only non-Sun Belt market, achieved a 10.1% return, fueled by Ohio State University’s expansion and major investments from companies like Intel and Amazon.
- Other notable markets, including Charlotte, Nashville, Austin, Fort Lauderdale, and Tampa, displayed mixed sales volume changes but maintained strong total returns, underscoring the Sunbelt’s favorable conditions as a key driver of retail CRE performance amidst broader market challenges.
- Essential Retail Resilience: Neighborhood retail focused on daily essentials—like grocery-anchored centers, and retail strip centers with mom-and-pop tenants—continue to perform well, even in uncertain times.
- Experiential Retail Rising: Consumers are prioritizing in-person experiences, including dining, fitness, and entertainment. This shift bolsters demand for retail spaces that cater to these activities.
- Omni-Channel Retail Strategies: Physical stores are evolving into critical components of e-commerce strategies, serving as showrooms, fulfillment hubs, and customer engagement spaces. Although COVID and the work from home movement drastically changed the nature of the retail landscape, one thing that we did realize is that human beings are social creatures, and they like to physically go out and be around others while shopping. This has led vacancies at open-air shopping centers in the U.S. have dropped to historically low levels, with only 6.2% of space available for rent, the lowest since 2006. Landlords have gained the power to raise rents as leases expire, a shift attributed to the scarcity of new construction due to higher interest rates and soaring building costs.
February Focus: Florida’s Retail Real Estate Market
Florida is a standout market for retail investment in 2025. Here’s why:
- Orlando: A Vibrant Retail and Tourism Hub
- Availability Rate: 3.9% (one of the lowest in top markets).
- Asking Rent Growth: 4.5%.
- Total Return: 8.9%
- Inventory Leased: 1.6%
- Orlando’s flourishing tourism sector and rapid population growth create a high demand for retail spaces, positioning it for another stellar year.
- Tampa: Resilient Amid Challenges
- Availability Rate: 3.4%.
- Asking Rent Growth: 4.4%.
- Total Return: 7.8%.
- Inventory Leased: 1.6%
- Even with a significant decline in sales volume, Tampa’s strong rental growth and impressive total returns reveal a thriving market in the long term.
- Fort Lauderdale: A Leader in Sales Growth
- Sales Volume Increase: Fort Lauderdale is leading the pack in year-over-year growth.
- Availability Rate: 4.4%
- Asking Rent Growth: 1.4%.
- Total Return: 6.2%.
With population growth, tourism, and favorable tax policies, Florida remains a top pick for retail investors this year.
Closing Thought on Retail Real Estate This Year
At Matthews ™, we pride ourselves on delivering insights that benefit retail asset owners and investors. Our robust pipeline of active listings and nationwide buyer connections allow us to provide real-time market feedback. By leveraging our market knowledge, we can help you understand the overall performance and current value of your retail asset. Whether you’re considering new opportunities to invest or divest, we’re excited to share our insights and help you make informed decisions.
