A Retail Real Estate Renaissance

Across the U.S., retail real-estate vacancies have decreased, rents have increased, and more stores are opening — not closing. Brick-and-mortar stores are seeing a resurgence as consumers forced by the pandemic to embrace e-commerce have returned to in-person shopping.

In August, retail sales grew 0.3% — a gain outpacing inflation and reversing the 0.4% decline in July — with shoppers spending more on clothing, groceries and cars. And while many experts predicted that the Covid-19 pandemic would forever alter the retail landscape, e-commerce stores find themselves facing slowdowns. 

Recent data suggests a rebalancing between online and in-person shopping. For example, according to Census Bureau data:

  • In Q2 2020, online retail surged from 4% to 15.7%
  • In Q2 2021, the online share had dropped to 12.9%
  • By the end of March 2022, online spending fell 3.3% — its first YOY decline since November 2013
  • Meanwhile, brick-and-mortar stores saw an 11.2% increase in sales, according to Mastercard SpendingPulse.

A Return to In-Person Shopping

Foot traffic hasn’t fully reached pre-Covid levels, but it’s improving. Indoor mall visits grew 17% in March from the previous month. According to Placer.ai, outlets and open-air lifestyle center visits increased by 26% and 18%, respectively. And in 2021, retailers opened more physical stores than they closed — a first since 1995 according to a Morgan Stanley analysis.

The retail real estate industry has seen its share of challenges over the decades: hundreds of retailer bankruptcies, low demand in malls, extensive vacant storefronts, and slowed construction of new retail spaces.

Yet we’re seeing more developers renovating older properties even as they cautiously approach these projects. Many seek out tenants even prior to breaking ground. Another trend within the retail space is driven by online companies opting to use real estate to expand their customer base. Warby Parker Inc., for example, opened nine new locations in Q2 2022, bringing its number of physical stores to 178. 

Designer Todd Snyder found his online sales tripled after he opened a physical store in Manhattan in 2016. The menswear designer said his brick-and-mortar approach empowered him to build brand awareness, increase outreach, and solicit consumer feedback.

A Conservative Approach Pays Off

Retail companies benefit from years of a minimalist approach to construction enabling many to conserve the funds they need now to expand. One estimate suggests we’ll see 2,600 new stores needing about 23 million square-feet of space opening in the next few months. A real estate firm owning a majority of the country’s malls recently found that spending is 31% above pre-covid levels.

According to Morgan Stanley, high-end mall operators, like Brookfield, Simon Property Group, and Macerich Co., have seen occupancy rates in their properties recover up to 90%. Will that trend continue? It depends on many factors, including inflation and rising interest rates, and the possibility of a deeper recession. 

But even as they negotiate these and other potential road bumps, the retail industry can take heart knowing its performance is strengthened and that the sector is more than capable of weathering tumultuous times. 

Current Turbulence? Nothing New

Prior to 2008’s global financial crisis, the retail sector had been growing at four to six times the rate of the U.S. population since the 1970s. Currently, there each U.S. person has about 22 square-feet of retail real estate, which is almost eight times China’s rate and more than double France’s and the U.K.’s per-capital square footage.

Post-World War II saw significant retail construction building, from retail chains and shopping malls to big box stores anchoring sprawling, open-air shopping centers. Construction continued until 2008’s recession, which was, coincidentally, about the time e-commerce was becoming more popular among middle-class shoppers. 

Over 850 retailers declared bankruptcy in 2008 and 2009. Building projects declined. In fact, since 2010, fewer than 150 million square-feet have been delivered annually. By the time the world went into lockdown in March 2020, retailers had already adjusted to the growing popularity of online shopping. 

One benefit to this increased demand? More retailers recognizing the need to accelerate their integration and execution of online and in-person services. The more choices customers have, the more likely they’ll remain loyal to a specific company or brand. 

The Future of E-Commerce

The momentum carrying e-commerce through the pandemic has waned. Big online retailers, including Amazon, eBay, and PayPal, have posted losses this year. Yet online sales remain higher than pre-pandemic levels. And consumers may revert to their 2020 shopping behaviors if we see a resurgence in Covid or other viruses — or if companies continue a trend toward investing in improving the digital customer experience.

The internet remains a great option for researching products and finding reviews. But it can’t replace the experience of discovering something new in an aisle. And it can’t replace other elements of the in-person shopping, either. 

Challenges Remain

It isn’t all rainbows and sunshine for the retail sector. Big tenants like Bed Bath & Beyond have filed for bankruptcy and others including Kirkland’s, Party City, GameStop, and Rite Aid have been identified as having a higher chance of bankruptcy.  Remote and hybrid work has reduced foot traffic among retailers located in office-dependent neighborhoods. 

And some experts who say the U.S. is “over-retailed” predict that over 10% of the current 115K shopping centers and 30% of the existing 1,100 malls will fail and need to be demolished. Yet even while some retailers have struggled since 2020, the rates of bankruptcy are nowhere near as high as they were during the 2008 financial crisis. 

But retailers will continue to reinvent themselves. Big box stores like Walmart are building automated small fulfillment centers — a move intended to facilitate processing and meet demand, for example. And Best Buy is reimagining some of its stores as “experience centers” to showcase furniture, fitness equipment and other premium merchandise.

The economy may remain volatile for a while, but continued strong job growth and rising wages will maintain a strong tailwind for consumer spending.

If you’re interested in learning more about the retail real estate sector specifically, please visit CREA United’s Collaborative Retail Real Estate Group

We also invite all CRE investors and those looking for specific properties to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more. 

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