Expect to see more blockbuster retail property deals like the recently announced Cedar Realty Trust, experts say. The cost of capital required to fund such acquisitions is getting more attractive, and more private capital players are entering the retail property sector seeking big returns.

“As dry powder earmarked for commercial real estate investment continues to grow, there is a growing sense of urgency among large investors to deploy capital efficiently,” said Sheheryar Hafeez, managing director in the New York office of JLL Capital Markets. “It appears the strong appetite for large portfolio deals is here to stay.”

Retail has gotten a lot more attractive lately, especially compared to struggling office properties. Retail REIT rent collection, cash flow and occupancy levels are recovering as spending patterns stabilize in the wake of the pandemic. Funds from operations of U.S. retail REITs rose 3% to $3.2 billion from the third to the fourth quarter, according to NAREIT. And occupancy rates in the retail REIT sector increased 70 basis points to 96% in the fourth quarter. By comparison, office REIT occupancy rates declined 30 basis points to 89.6%, the trade group reported.

Retail REIT dividends and share prices largely reflect the positive operational trends. Retail REIT returns grew by 88% from 2020 to 2021, according to JLL. Similar growth in self-storage and hotel REIT shares helped pushed M&A in the REIT sector to $140 billion in 2021, one of the strongest years on record, the firm reported.

Bigger Is Better for Now

The deals in 2021 were big, and they’re getting bigger as entire portfolios instead of individual properties are being shopped around. The number of transactions priced higher than $500 million, or “megadeals,” rebounded sharply in the fourth quarter, in particular. That was on par with the prior quarterly record, set in 2019, according to JLL. Megadeal volume increased to $33.4 billion in 2021, 22.9% higher than the $27.4 billion transacted in 2019. “Average REIT transactions in 2021 were $7 billion, nearly twice the size of deals from the prior decade, and mostly involved a smaller marketing process,” Hafeez said.

REITs have an incentive to buy other REITs, too. Bigger REITs can achieve bigger cost efficiencies. Currently, a median REIT owns $4.5 billion of real estate, which is 50% more than in 2010. And larger REITs across each major sector have posted outsize total shareholder returns since 2010 compared with the smaller REITs in the same sector. In addition, larger REITs have traded at a higher premium to net asset value when compared to smaller REITs.

However, it’s not just the big, publicly traded REITs competing for portfolio-level acquisitions. “The nonlisted REITs alone raised over $11 billion in 2021 on a rolling three-month basis, led by Blackstone Real Estate Income Trust,” Hafeez added. “With new entrants entering the nonlisted REIT space, we will likely see increased competition for large transactions, including REIT M&A.”