Retail Real Estate Is Seeing Its Biggest Revival In Years
During the first decade of the 21st century, many investors believed that retail real estate would become a dead sector of commercial investing. When traditional shopping malls dropped significantly in popularity and eCommerce solutions were developed to provide customers with more convenience, there were indications that retail real estate was a less sound investment than usual.
The same worries resurfaced when the COVID-19 pandemic began and everything shifted online. While there were some concerns that shoppers would remain online even after stores came back, the reality is that retail is evolving. The latest trends point towards retail real estate having its largest revival in years and is only set to improve in the long-term.
How Retail Real Estate is Currently Performing
While retail centers temporarily became less appealing to commercial real estate investors following the COVID-19 pandemic, foot traffic has been returning to retail in waves over the past year. In 2021, the growth of brick and mortar retail sales surpassed eCommerce retail growth for the first time at a difference of 18.5% to 14.2%. While eCommerce is still highly popular, these numbers indicated that eCommerce growth wouldn’t continue unabated.
Now that consumer interest in retail real estate is returning, the businesses that have been able to endure are increasing their profits and building their brands. Another reason that investors are finding retail real estate to be a great investment is because of the current supply and demand. Retail still isn’t receiving a large amount of new supply over the past few years, which means that an increase in demand should result in rents increasing and occupancy levels rising.
During Q2 2022, retail vacancy in the U.S. dropped to 6.1%, which is the lowest rate in more than 15 years. Since vacancy rates were low, the average rent increased to a rate that’s around 16% higher than it was five years ago.
One sign that points towards renewed confidence about brick-and-mortar stores is that more than 5,100 retail stores were opened in 2022, which is nearly double the number of retail stores that were closed in the same year. The current estimates for 2023 appear to be similar to the 2022 results, which means that retail real estate should continue to grow.
When you combine the low construction in this sector with the foot traffic increase and the resurgence in brick-and-mortar sales, retail is among the strongest commercial investment sectors that you can add to your portfolio this year. While office buildings are still going through a sluggish recovery phase following the move to a work-from-home arrangement, the retail sector is at the strongest it’s been in years. This sector can deliver strong cash yields despite the high interest rate environment. The resiliency of this cash flow is also better than it’s been in more than a decade.
Retail Buildings that are Experiencing the Largest Growth
While nearly every type of retail building is performing well at the moment, some are doing better than others. Neighborhood shopping centers are well-positioned to provide residents with some of the convenience that they seek from eCommerce solutions. Grocery-anchored stores are also highly appealing to consumers because of the ability to reduce the number of stores that they need to travel to during a shopping trip. In fact, these stores have the largest share of all retail property types when it comes to total sales volume.
How the Market Will Impact Retail Real Estate for the Remainder of 2023
Nearly all of the fundamentals for retail real estate are currently strong. Both rental rate growth and occupancy rates are high. At the same time, supply will continue to be limited given that the costs of financing, raw materials, and labor make new construction unappealing.
Inflation is likely peaking in most markets. Once interest rates stabilize, transaction activity by retail investors should increase. Another benefit of inflation going down later this year is that consumer spending power will be higher, which increases the likelihood that consumers will make purchases at retail locations. As touched upon previously, neighborhood stores should be a good investment this year since remote-work policies are still in place. Consumers prefer to shop locally.
When you want to add retail real estate investments to your portfolio, this type of investment has the potential to deliver high and consistent returns. Make sure, however, that you consider the location of the property before investing in one of these spaces.