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| 1 minute read

A Retail Renaissance

When you hear the phrase “commercial real estate” these days, you can’t help but think of the slumping state of the office real estate market with its more than 18% vacancy rate at a 30-year high. But behind the escalating stories of office market doubt and downturn sits a shining beacon in the CRE industry that many have long discounted since the advent of online shopping: brick-and-mortar retail real estate.

“Retailers are on track to open a 1,000 new net stores in the U.S. this year as retail availability hits record lows,” reports the Wall Street Journal (“A Bright Spot in Commercial Real Estate: Retail Shops,” August 21, 2023). The current strength in the retail market has nearly quashed long-standing predictions that the internet and its ease of ordering would put an end to the retail market as we knew it. While remote work has strained office owners and landlords in urban centers, the shift to flexible schedules for workers in the suburbs has revived the pace of retail expansion, contributing to a 6.3% increase in the asking rent for retail space since Q2 of 2022.

After living through the pandemic years of being relatively locked out of unrestricted retail movement, consumers are ready to return to their roots, visiting the gym (Crunch Fitness is opening more than 60 new locations this year), dining out (and not just outside), and perusing the aisles of grocery stores, high-end open air centers, and enclosed malls. Though Class B and C malls continue to struggle, the comfort embedded within the American retail experience shows no sign of dissipating. In spite of the looming specter of inflation and recession, retail activity continues to outpace expectations.

A great realignment of modern-day life, which commenced with the COVID pandemic, continues to transform the CRE industry with, among other things, the shift to hybrid work and, as it does, one thing is clear: the future of retail is bright. How owners, developers, retailers, investors and consumers take advantage of this shifting landscape will be closely watched.

Retail’s strength is largely the result of a sharp drop in retail construction since the 2008-09 financial crisis, which allowed the oversupplied sector to digest its existing real estate. Retailers, meanwhile, started using online sales data and analytics technology to pinpoint locations for successful stores. Also, predictions that internet sales would wipe out physical retail failed to materialize. Digitally native companies are opening bricks-and-mortar locations after reaching the limits of online customer acquisition. Shoppers flocked back to stores and restaurants as pandemic restrictions eased.

Tags

real estate, retail restaurant & consumer, workouts & restructuring, perspective