CBRE’S Brandon Isner on retail’s beckoning future

Retail has become quite the conundrum. We hear that retail has never been worse. Then retail has never been better. We eat up those headlines, because let’s face it – the general public has a bigger window into the state of retail than any other commercial real estate sector. We can walk by office buildings, or hotels, or apartment buildings and not know what’s going on inside those walls. But we can all take a walk through a retail center and see which shops have vacated or which restaurants have a line out the door.

But it brings us to a point: extremes supply the averages. Because in reality, retail spaces are increasing their productivity on a per sq. ft. basis, quite steeply. In short, retailers are doing more with less.

How is that possible? We always hear that the U.S. is over-retailed. That we’re headed for a retail apocalypse. Well, we’re not.

Within commercial real estate, black swan events such as the COVID-19 pandemic can encourage very quick and sharp reaction. This is what we’ve seen in retail. Foot traffic was reduced to zero for non-essential retail. E-commerce share of total retail sales ballooned as consumers had few other choices. Grocery spending took back the higher position with its battle against restaurants on who rules food and beverage sales.

But things began to recover. The foot traffic analytics company reports that traffic has surpassed 2019 levels even some of the super-regional malls which media have branded as “endangered.” E-commerce’s share of total sales has stabilized as of late. Spending at restaurants has once again topped grocery receipts. Again, extremes supply the averages.

“We always hear that the U.S. is over-retailed. That we’re headed for a retail apocalypse. Well, we’re not.”

What are the averages? Retail availability remains is currently sitting near 10-year lows, as per CBRE’s Q3 2021 Retail Figures report. The turbulence of COVID-19 was nowhere near what we saw during the Great Financial Crisis. That was an extremely difficult combination, a boom of retail development followed by a two-year recession. In comparison, our current situation is much more manageable.

Rent growth tells a similar story. According to CBRE’s Econometrics Advisors, retail rent growth went negative in 2008 and stayed there until 2012. Since then, rent growth has been modest, but steady. Post-pandemic rent growth has accelerated and is expected to continue. Rent growth for open-air retail centers is expected to average 2.3% annually from 2022 through 2025.

All in all, brick-and-mortar retail spaces are elevating their productivity. The boom within retail supply early in the century did a number on the sales per sq. ft. of existing assets. However, the recession in 2008 almost immediately cut off the retail development pipeline, which never again has risen above long-term completion averages. This allowed retail sales to catch up with supply. On an indexed basis, sales per sq. ft. in retail have almost completely recovered to those early 2000’s levels, and I believe they could be surpassed in 2025.

From 2010 until 2020, retail sales grew by 42%, while retail supply grew just 4%, as per a recent study by CBRE Research. Online sellers fueled much of that growth, but brick-and-mortar is now rapidly benefitting from omnichannel activity. M-commerce—buying on mobile phones—has accelerated buy-online-pick-up-in-store and eMarketer predicts an increase of 19% in m-commerce for the 2021 holiday season, totaling upwards of $97 billion.

Retailers still face challenges this holiday season. They’re forced to offer inflated hourly wages and signing bonuses to entice seasonal workers. Supply chain issues abound. Retailers are attempting to negotiate the obstacle by inflating inventory or are attempting to spread the shopping season over a longer period of time. Some large retailers are even hiring their own cargo vessels in hopes of bypassing port congestion.

Concerns aside, the 2021 holiday season is shaping up to be an exciting one. It is expected to generate record levels of sales volume and go a long way toward restoring retail confidence for 2022 and beyond. This December returns us all to the gift-giving, coffee dates, dinners, reunions, and camaraderie robbed from us in 2020. But, for this holiday season and beyond, retail is back and open for business.

About the Author

Brandon Isner

Brandon Isner is an associate research director at CBRE and its leading expert on Florida markets.

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