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CBRE’s Head of Americas Research Offers a Contrarian View on Retail REITs

Spencer Levy cautions that industrial and multifamily will confront short-term supply headwinds, and stresses that retail has been unfairly pummeled.

Spencer Levy, head of Americas research at commercial real estate services firm CBRE, makes it clear that he’s not in the business of giving stock tips. Nonetheless, he certainly has his favorite sectors among public and private REITs.

Industrial and multifamily top Levy’s list of standout sectors, while he says retail is the most challenged category in commercial real estate. However, Levy cautions that industrial and multifamily will confront short-term supply headwinds, and stresses that retail has been unfairly pummeled.

Levy’s market assessment aligns with investor sentiment. In a CBRE survey earlier this year of about 300 investors in the Americas, 50 percent identified industrial as their preferred property sector, with multifamily ranking second at 20 percent. Only 10 percent of the investors favored retail.

In a Q&A with NREI, Levy explains how “local is the new global” philosophy is buoying industrial, why investing in multifamily represents a strong long-term strategy and why e-commerce pressures facing retail are overblown.

This Q&A has been edited for length, style and clarity.

NREI: Do you have any sense about how long industrial will remain a sector that performs well?

Spencer Levy: There are two simultaneous trends that will bolster industrial for some time. One of the trends is obviously e-commerce, which involves the “last mile,” and that’s probably the largest demand-driving trend.

There’s a second trend out that not as many people talk about that I call “Local is the new global.” You probably have seen a boom of microbreweries, right? Why are you seeing all these microbreweries? Is it trendy? Is it cool? Do people like beer more? The answer is no. The answer is it might be trendy and cool, but people don’t like beer more. What it is is that people are now forming more local businesses that can compete with the forces of globalization and automation. Some of these local businesses are microbreweries; they tend to be in smaller industrial buildings.

So, the real trend that you need to follow is not industrial overall, but it’s the shift of the definition of what constitutes institutional-grade industrial, which was solely large warehouses and distribution centers.

How long will this last? Well, it will last as long as we don’t build ourselves into a problem. In two of the last several quarters, we’ve seen new supply exceed absorption; supply is becoming an issue in some markets. I think industrial doing well will last for a very long time, but you may see some short-term excess supply issues.

NREI: What about multifamily?

Spencer Levy: If you’re in the real estate game for a long-term hold, there’s no better place to be than the multifamily space. Similar to industrial, you will see some short-term supply issues. But overall, the preference for renting versus buying is only increasing, so multifamily is a great place to be over the long term.

NREI: And what’s your take on retail?

Spencer Levy: Retail has gotten crushed over the last two years because of the negative implication of e-commerce. In my opinion, it is the single biggest overwrought story in commercial real estate. Most retail that’s owned by public REITs is not going to be put into oblivion by e-commerce; REITs have been shedding some of their second-tier, less internet-resistant assets for a long time. They tend to have better assets in these REITs that are grocery-anchored and/or are in strong demographic locations.

I like the long-term [outlook] of industrial and multifamily because of the positive trends. But I think that the attractive buying opportunities from a capital markets perspective are in the retail REIT space, in large part because there’s been a tremendous overreaction to the encroachment of the internet.

When people ask me about retail, I’m very direct. I say that the fundamental disruptor of retail is not e-commerce, it is demographics, meaning there have been demographic shifts out of certain areas that mean you cannot re-tenant into one of these experiential or other types of retail. If you have strong rooftops, strong growth, you’re going to be just fine.

Some people will say, “Oh, well, take a look at New York City retail—that must be a harbinger for the broader market.” Not true. New York City retail and a grocery-anchored shopping center in Yonkers are apples and oranges. One is based upon the luxury and international segment of the market; the other is based upon necessity retail for the local rooftops. So, the reason why New York City retail has seen some softness in the last year is because of overpricing. People pay a lot for these assets, and they have to charge rents that are beyond where retailers are now willing to pay. But the overall strength of the New York City market hasn’t changed.

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