Publicly traded REIT ShopOne is joining forces with global private asset manager Pantheon and an institutional investor to buy as much as $1 billion of grocery-anchored properties in high-growth U.S. markets.

The venture is launching with a $225 million senior credit facility and properties from ShopOne’s existing portfolio. It will try to buy as many necessity-based, value-oriented grocery-anchored centers as it can find in high-population areas, college towns and tourist destinations. ShopOne’s contribution is an existing portfolio of properties and its management and leasing expertise. Pantheon and the institutional investor will supply capital.

“We are very excited to form this partnership with two highly experienced institutional partners that possess deep relationships within the investment community,” said ShopOne CEO John Roche. “Like us, they are bullish on the near- and long-term fundamentals of grocery-anchored shopping centers and the attractive risk-adjusted returns these assets can generate. By combining forces, we have the capital and platform to strategically add scale in the markets we target.”

REITs Are Paying More for Shopping Centers

REITs are willing to spend more for less upside on retail properties these days as the sector gains more perceived value. For the three months ending in February, cap rates on retail property purchases made by REITs compressed by 44 basis points from November to February, by investment firm CenterSquare’s tally. By comparison, the all-REIT average compressed by only 29 points.

A cap rate is net operating income divided by the price paid for the asset; it represents the rate of return on a real estate investment property based on the income the property is expected to generate.

The implied cap rate for retail REIT deals over the three months ending in February was 6.08% according to CenterSquare. That compares to 4.73% for all REITs. Cap rates on REIT retail deals remain significantly higher than those on industrial, at 3.18%; apartment, at 3.94%; hotel, at 5.31%; and office, at 5.62%. That means retail deals still are relatively cheaper for investors seeking to allocate funds to the commercial property sector.

Shrinking U.S. Retail Vacancy Leads to Rising Rents

Retail occupancy is tightening in the U.S., allowing landlords to raise rents, according to National Association of Realtors research economist Brandon Hardin’s analysis of CoStar data. For the three months ending March 17, the U.S. retail vacancy rate was 4.7%, a marked improvement from 5.1% a year earlier. Meanwhile, asking rent for retail space averaged $22.90 per square foot for the three months ending March 17, a 3.9% increase from the same period in 2021. Retail asking rents are growing in 99% of the 390 metro areas NAR examined. The markets where retail rental rates grew the most year over year during the first quarter were Las Vegas, up 11.4%, and Jacksonville, Florida, up 11%.