Brookings: Retail is commercial real estate’s 2nd most valuable asset class
Though malls and shopping centers saw traffic dip or were even shuttered during the spread of COVID-19, retail has proved to be the most stable commercial real estate asset throughout the pandemic, according to a report from Brookings.
For the first time in two years, retail real estate has re-emerged as the No. 2 CRE class in the United States, posting a total value of $3.03 trillion in a study done by CoStar that was included in the Brookings evaluation.
Industrial properties finished third at $2.91 trillion, and the office sector came in fourth at $2.43 trillion — some 23% (or $750 billion) less than it was worth in 2019.
Multifamily retained its No.1 standing with a national value of $4.61 trillion, but, like office, that number is the low point of a swan dive from a $6 trillion worth recorded in 2021.
Available supply of retail space at the present time, meanwhile, is nearly non-existent. CoStar currently puts retail’s inventory at a total of 12.11 billion square feet and sets demand for it at 11.61 billion sq. ft. — a nationwide occupancy percentage of nearly 96%.
“Demand for retail space has actually grown from its pre-pandemic level,” read the Brookings report. “In contrast, the gap between supply and demand for office space continues to grow, with demand shrinking by 160 million square feet since Q1 2019. And while demand for industrial space grew the most, an explosion in supply has produced higher aggregate vacancy for that product, leaving the retail market the tightest CRE category.”
Not surprisingly, considering these conditions, retail leads all commercial real estate sectors in investment returns on unleveraged property investments with a rate of 3.56% in 2024. Industrial properties posted a national return rate of 1.59%, while the multifamily and office sectors suffered declines in the 5% to 6% range.
“While at first glance this figure is a startling illustration of the volatility of industrial and multifamily returns in recent history, at second glance retail emerges as a workhorse for investors,” Brookings observed.
Brookings noted, however, that retail vacancy rates vary widely market by market.
“Across regions, one quarter or more of submarkets have extremely high vacancy rates, which is consistent with the longstanding phenomenon of retail inequality, in which majority-Black neighborhoods, regardless of income, are underserved by retailers, leading to higher vacancy rates,” the report noted.
