Written by: Grant Chaney, CCIM and Brent Chaney
Grant and Brent's primary role at Colliers is to assist and advise commercial real estate owners on property valuation, conduct in-depth investment analyses, and represent clients in the sale of commercial investment properties. Their core focus is helping clients achieve their investment goals efficiently, minimizing stress, effort, and wasted time, while maximizing returns. Keep reading for their insights on the current state of the Midwest retail investment market.
Market Outlook
Ongoing challenges in debt financing defined the commercial real estate market in Q4 as investors navigated a lending environment characterized by cautious underwriting. Traditional banks remained restrictive in their loan approvals, prompting borrowers to seek alternative financing sources. Midwest retail sales volume reached $1.17 billion in Q4 2024, reflecting a 9% increase from Q3’s $1.07 billion and a 15.5% year-over-year gain from Q4 2023’s $1.01 billion. This rebound follows a Q3 decline and suggests renewed market activity, potentially signaling early signs of stabilization after a period of fluctuating sales.
Cap rates increased across all retail center types in the Midwest and nationally, continuing the trend throughout 2023. In Q4, the Midwest retail cap rate for all centers reached 8.02%, the highest in recent quarters. This indicates that pricing adjustments still occur amid a high-interest rate environment, continuing price discovery. The combination of elevated sales volume in the second half and rising cap rates suggests that the gap between buyer and seller expectations continues to narrow, facilitating more transactions compared to early 2023 and late 2022.
As Q4 has historically been one of the most active quarters of the year, we will continue monitoring how these trends develop into early 2025. The availability of financing and the trajectory of interest rates will remain critical factors shaping the retail investment landscape in the Midwest.
Fourth Quarter Takeaways
Investment Activity: In Q4, retail investment sales volume rose to $1.17 billion in the Midwest and $9.74 billion nationally. This is only higher than Q3 in the Midwest during 2024 but the highest since Q3 2023 nationally.
Current Inventory: Although inventory increased again in Q4, the retail investment market continues to have well below-average supply, which directly contributes to below-average sales volume.
Cap Rate Trends: Retail center cap rates remained relatively stable in the fourth quarter nationally, while anchored center and grocery anchored center cap rates in the Midwest fell 26 and 18 basis points respectively.
Pricing Growth: Retail centers across the Midwest saw price per square foot increases in Q4, with unanchored centers experiencing the most significant gain of $8.31. Retail centers performed well nationally, as grocery-anchored centers rose by $10.86. Unanchored centers nationally recorded the only decline decreasing by $3.33.
Debt
Debt and the ability of investors to access capital continue to be the most important factor driving the retail investment market. Life insurance companies and credit unions are doing the bulk of the lending, with banks on the sidelines for commercial lending. The 10-year UST increased over 83 basis points in Q4 to 4.57% after starting the quarter at 3.74%. This has caused a substantial increase in lending rates for investors if they can get a loan.
Check out the full Q4 2024 Midwest Retail Investment Trends report here!
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