Cap Rate Analysis: Retail

Asset Type: Retail

Retail performance is also marked by great variability across regions. Annual returns ranged from a low of ‑21.3% in the West Coastal region in the first half of 2021 (confirming the damage of the COVID-19 lockdown) to a high of 21.0% in the Northeast in 2018. This represents a 42.4 percentage point spread. The Midwest presented the worst average annual performance at 0.2%. The national average annual return was 0.6% over the 2005-2021 period.

The best holding period and geographic combination as an investor in retail would have produced a 28.8% return in the Northeast over the 2010 to 2014 window, reflecting gains from the early stage of the post-credit crisis recovery. The worst performing window was between 2007 and 2011 in the West Coastal region, with an HPR of ‑22.5%, an even more dramatic drawdown than the one experienced over the course of the pandemic (21.3% in the first half of 2021). The range in period returns over the 5 selected windows is 51.3%, again illustrating the importance of timing – in this sample, avoiding the pandemic 2021 would have produced an average pickup of 9.8% on the returns of a retail portfolio. Avoiding 2009, on the other hand, would have produced an average pickup of 11.6% on the same returns (21.4% total combined impact).

Main takeaways:

For retail, the best-performing geography over the 17-year period was the Northeast (14.7%); the worst-performing geography was the Midwest (0.7%)

The best-performing investment window nationally was over the years 2010 to 2014, with an HPR of 22.7%, reflecting the early recovery from the credit crisis

The best performing region over the same period was the Northeast closely followed by the West, with 28.8% and 28.4% respectively

In terms of performance variability, national annualized volatility was 4.9% over the 17-year window, compared to a high of 17.0% in the Northeast and a low of 6.8% in the South in the same period. For context, the average long-run volatility of the S&P 500 ranges between 10% and 20%, with per annum volatility usually assumed around 15%