The 5 US cities for retail investing that are most likely to outperform benchmarks

Which US cities are most likely to beat the benchmark for retail real estate investment returns?

Tis’ the season for turkey dinners, holiday playlists, and – you guessed it – shopping. As Christmas lights are carefully strung across eaves troughs and bins of decorations are dragged out from the basement, droves of shoppers descend upon storefronts (of both the online and offline variety) in the hopes of getting their holiday shopping done early – and capitalizing on Black Friday deals while they’re at it.

To this effect, Capital One research reveals that American consumers spend almost $10 billion shopping online on Black Friday, and over $20 billion when in-store spending is included. What’s more, 139 million Americans specifically bought holiday gifts on Black Friday 2023, with holiday shoppers spending 29.4% of their gift-buying dollars during this time.

The retail sector has demonstrated surprising resilience this year while contending with an economic landscape that could be described as uncertain at best, and volatile at worst. While consumer spending has remained strong across most categories, retailers have had to adjust their offerings to align with consumers’ current needs and preferences.

“Retail real estate has demonstrated remarkable resilience, fueled in part by limited construction following the Great Financial Crisis,” notes Cole Perry, Associate Director of Research at Altus Group. “The rightsizing of spaces and the shift to experiential retail have not only counteracted some of the impact of e-commerce but have also made it complementary, offering unique in-person experiences that online shopping cannot replicate. In the wake of the pandemic, the collapse of some legacy retailers presented a generational opportunity for owners to rethink and reposition spaces. Combined with a strong post-pandemic consumer, this has made retail real estate an increasingly attractive investment opportunity.”

Across the US, we’ve seen a notable shift in retail trends, including the decision of big-box, legacy stores, like Macy’s, to transition to smaller-format, boutique offerings, while revitalization efforts have transformed legacy malls and shopping centers into modern mixed-use hubs in key cities. At the same time, a bifurcation effect appears to be giving luxury brands and discount retailers an edge over ‘middle-market’ stores in the current market, where consumers demonstrate a preference for high-end goods and discount deals. And while today’s consumer may be increasingly cost-sensitive, the US Commerce Department reported that retail sales rose 0.4% from September to October – an increase that can be attributed to higher prices and increased purchases.

Now, with Black Friday fast approaching, a surge of retail activity is expected (both online and offline), from consumers eager to find the best deals of the holiday season. According to the National Retail Federation and consumer research firm Prosper Insights & Analytics, 183.4 million people will shop in US stores and online between Thanksgiving and Cyber Monday.

In the past, we’ve identified the top 5 US cities for industrial and multifamily investments that are more likely to outperform the benchmark than other cities, based on a score created using the Capital Asset Pricing Model (CAPM). In anticipation of Black Friday, Sally Johnstone, Sr. Manager, Market Insights Delivery at Altus Group, leveraged this same methodology to pull back the curtain on retail commercial real estate performance across different US markets.

The CAPM model provides an alpha and beta score that predicts the future performance of CRE sectors in different markets compared to NCREIF NPI benchmark returns. To understand the scores provided in Johnstone’s analysis, which was completed in Q4 2024, it’s important to know the following:

• The alpha score measures how well an investment performs compared to the benchmark, based on its risk

• A city/sector combination with an alpha score of zero and a beta score of 1 is expected to perform in tandem with benchmark returns

• A positive alpha score indicates a city/sector combination that is expected to outperform benchmark returns

• A beta score greater than 1 carries greater risk, but also a greater potential reward

• Higher betas outpace the benchmark when the benchmark is increasing (but also bring more downside risk, as they decline faster than the benchmark)

A more detailed breakdown of the CAPM approach is provided at the bottom of this article. 

Interpreting retail real estate investment returns

It’s important to note that benchmark-beating retail returns are not necessarily driven by high-priced retailers. Rather, returns are built from both the change in value of an asset and its net operating income. Moreover, the retail segment in commercial real estate goes beyond your local mall, big box, and specialty stores, but also includes grocery stores and supermarkets restaurants of all types, spas, and the corner gas station.

“While population and household income and wealth growth are predictors of future returns growth as demand increases, our analysis uses twenty quarters of city/sector returns from NCREIF to calculate a city’s alpha score,” notes Johnstone. “The data set captures only a few quarters of pre-pandemic returns and, as a result, the alpha scores of the cities that saw the greatest outflow and most severe shutdowns during the pandemic are typically lower than average. Post-pandemic, we’ve seen the removal – or conversion – of many older buildings and malls, as well as the removal of weaker retail companies from the mix.”

Las Vegas-Henderson-Paradise, NV

The highest retail alpha score in our analysis belongs to Las Vegas, Nevada. Perhaps this comes as no surprise, as shopping is frequently named one of the top activities for American tourists, and Las Vegas is one of the most popular destinations in the United States.

“During the height of the pandemic, Las Vegas visitors focused much of their spending on shopping, due to the temporary closure of entertainment venues,” notes Johnstone. “Las Vegas also returned to pre-pandemic tourism levels rather quickly – in fact, by 2021, gambling revenue reached record levels, while hotel occupancy rates crept back towards 80%. By 2022, Las Vegas welcomed close to 40 million annual visitors, closing in on its average of 42 million annual visitors between 2015 and 2019.”

Interestingly, when Johnstone ran the alpha-beta for the previous quarter, she noticed a significant shift in Las Vegas’s alpha score. “When we look at the quarter-over-quarter returns for Las Vegas, I can see that the region had a really good quarter in Q3 2024,” she adds. “While we can’t see exactly what happened to instigate this performance boost, we can assume that some retail properties may have had their values adjusted between Q2 and Q3 – likely a ‘rightsizing’ effect from pandemic to post-pandemic leases – which moved the return total in a positive direction.”

To this effect, average retail rent has increased year-over-year (YoY), and net absorption is projected to be negative through 2027, which implies that rents should continue to grow as supply falls short of demand. Market value per square foot for Las Vegas retail is also the highest of any of the CBSAs that are tracked in the NPI index, and its retail returns growth was the highest quarter-over-quarter.

“The other positive retail commercial real estate demand driver in Las Vegas comes from significant in-migration from cities in California,” explains Johnstone. “When the pandemic hit and remote work made living in lower-cost areas feasible, Las Vegas experienced an influx of people.” To Johnstone’s point, Las Vegas’s population grew twice the rate of the US overall in the past three years, and its labor force grew at twice the rate of the average US metro area over that same period. “As more companies call their employees back to the office, we may observe some outmigration from Las Vegas, but it likely won’t have an acute effect, and strong tourism will offset some of that change.”

Charleston-North Charleston, SC

Next on the list is Charleston/North Charleston, South Carolina. Cities in the sunbelt were popular relocation destinations during the pandemic, and similar to Las Vegas, Charleston stands out for attracting a significant influx of people over the last 24 months.

“Charleston’s GDP per capita, one measure of productivity and macroeconomic health, is significantly higher than average, at $61,600 per person vs. the US average $47,400 per person,” shares Johnstone. “Much like Las Vegas, the population and labor force growth rates in Charleston over the past three years are double the US average.”

Returns for Charleston’s retail sector doubled YoY, and market rents for Charleston retail increased 3.0% YoY. Charleston also has a relatively higher beta, at 1.6, and that has been reflected in higher-than-benchmark returns growth as the benchmark returns have grown.

West Palm Beach-Boca Raton-Delray Beach, FL

West Palm Beach, Florida finds itself in third place, with retail returns moving from 1.3% in Q3 2023 to 3.5% for Q3 2024. Average retail rents also increased 4.1% over the same period. When we take a closer look at its performance, we see that West Palm Beach tells a similar story to Las Vegas and Charleston – a significant influx of new residents (nearly 60,000 in the last 24 months, to be exact) appears to be driving increased retail demand and, in turn, increased retail returns.

“The people moving into West Palm Beach come from neighborhoods with median household incomes on average 32% higher than people already living in West Palm Beach,” explains Johnstone. “Their net worth is also 40% higher, and they are coming from areas with median home values 71% higher than in West Palm Beach. In other words, the region has welcomed an increase in consumer spending power and household wealth, placing West Palm Beach in the top five alpha score cities for apartment returns, too.”

Phoenix-Mesa-Scottsdale, AZ

Phoenix, AZ is fourth on the list of cities likely to beat retail benchmark returns – and it’s the number one alpha score city for apartment returns, reflecting its higher-than-average population and household income growth, as well as higher per capita GDP than average. “Retail rents in Phoenix have grown an average of 3.1% YoY, and unlike the Phoenix industrial sector, the retail sector in Phoenix is not facing significant potential oversupply in the near future based on its pipeline of new construction,” observes Johnstone.

Camden, NJ

The final city on the list of top five alpha scores for retail returns is, interestingly enough, the only city outside of the sunbelt in the top five.

“When you dig deeper into demographic and macroeconomic dynamics in the Camden, NJ area, some of the retail demand drivers become more clear,” explains Johnstone. “Though its population and labor force growth is only slightly higher than the US average, the homeownership rate in Camden is significantly higher than average, as are median household incomes and net worth.” If you’re wondering what this has to do with retail returns, consider this: based on BLS Consumer Expenditure data, homeowners spend 1.5 times more annually than renter households, and the biggest spenders of all are married couples with children, who spend twice as much on an annual basis as single adult households. “The percentage of households with children in Camden is higher than average and it’s added almost 10,000 households with children over the past three years,” adds Johnstone.

Conclusion

Retail has been a rather interesting CRE sector to watch over the last year; despite volatility in the market in response to high interest rates, recessionary fears, and political uncertainty, consumer spending has remained relatively strong. Although consumer behavior is always subject to change, the US Census Bureau data reveals a steady increase in retail sales over the past two months, reflecting relative economic strength and stability.

As you can see from the table below, total retail returns are higher in Q4 2024 than they were in Q3 2023, and the top five scoring cities reflect that growth. On an absolute basis, three of the cities on our list beat the benchmark return change quarter vs. quarter.

Even when looking at data – we don’t know what we don’t know. As people move back to cities and return to work, growing demand may raise market rents and NOI and have a downstream effect of increasing the value for retail assets in large cities faster than the current alpha score might predict. “Since the alpha and beta scores are dynamic models, once a city/sector combination’s returns start to outperform the benchmark, the city’s score will reflect that change,” adds Johnstone.

Understanding CAPM

Capital Asset Pricing Model (CAPM) is a financial model that calculates the expected rate of return for an asset or investment by using the expected return on both the market and a risk-free asset, and the asset’s correlation or sensitivity to the market (beta). In simple terms, CAPM helps you choose the best city and sector by balancing expected returns with the level of risk, guiding you toward investments that align with your risk tolerance and return goals.

Alpha and beta scores are based on the past 20 quarters of city/sector data for a given region. A positive alpha indicates returns that outperformed the benchmark, while a negative alpha indicates constrained returns compared to the benchmark. The beta score, on the other hand, reflects a city/sector combination’s relative sensitivity to the changes in benchmark returns. Please note that for our analysis, we use the NCREIF NPI as our benchmark.

For a deeper dive into this model and the validity of alpha as a predictor of future risk-adjusted returns, skip to minute 4:00 of our webinar: Using Data Science to Improve Your CRE Portfolio

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