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Growing optimism for retail and hotels

The high levels of distress that some had anticipated due to lockdowns did not materialize, and now the sector shows signs of strengthening.

Many areas of retail, including grocery-anchored centers and net lease retail, performed very well during COVID-19. The high levels of distress that some had anticipated due to lockdowns did not materialize, and now the sector shows signs of strengthening. “Looking back at the depths of the pandemic, retail didn’t get hit as hard as many people thought it would, and now investors are seeing many different types of opportunities,” says Daniel Taub, Senior Vice President and National Director of the Retail and Net Lease Divisions at Marcus & Millichap.

Vacancy rates improved 50 basis points last year to 5.2 percent, while asking rents increased by 3.3 percent, according to Marcus & Millichap. Forty-three percent of owners think retail values will rise over the next 12 months with an average increase of 3.7 percent expected, which is a notable improvement over the 1.0 percent increase predicted in the second-half 2021 survey. “Retail was definitely impacted by the pandemic,” Taub says. “Retailers that were already in trouble went out of business or closed stores.” However, the shake-out of “zombie” stores that had been hanging on has actually helped put shopping center owners in a better position where they can evolve and innovate, he says.

Growing confidence is reflected in more positive sentiment for buy-sell decisions and expectations for rising valuations. Nearly half of retail investors (44 percent) think it is a better time to hold assets. However, the 35 percent that said it was a better time to buy shows a big improvement over the 17 percent who thought it was a good time to buy in the second-half 2021 survey. Twenty-two percent believe it is a better time to sell.

Hotel investors’ views on the buy-hold-sell strategy remained consistent with the second-half 2021 survey. Forty-five percent of respondents consider now a good time to buy, while 46 percent said it is a better time to hold. Those who think it is a good time to sell are in the minority at 9 percent. However, performance within the hotel sector remains choppy, notes Biran Patel, Senior Vice President and National Director of the Hospitality Division at Marcus & Millichap. Hotels have seen a substantive revival in the limited service sector, while full-service hotels are still struggling, especially those located in urban core areas of major metros and those that cater to conventions.

The same general themes driving the return to work also apply to business travel. “When we get to the endemic stage and society says it’s OK to go back to the office and it’s OK to travel again, that is when we’re going to see a bigger recovery in the hotel sector,” Patel says. “We’re starting to approach that corner, and that is influencing sentiment around buy-sell decisions and views on improving valuations.”

More than half of hotel investors (57 percent) think values will rise in the coming year with an average increase in values of 7.3 percent, compared to the 4.8 percent increase expected in the prior survey. The STR and Tourism Economics 2022 U.S. hotel forecast calls for average daily rates (ADR) to surpass pre-pandemic levels this year to reach $134, while revenue per available room (RevPAR) and occupancies are not forecast to reach pre-pandemic levels until 2023. RevPAR is expected to improve to $86 this year and occupancies to 63.8 percent. However, when adjusted for inflation, the full recovery of ADR and RevPAR is not projected until after 2025, according to STR and Tourism Economics.