Thursday, August 24, 2023

Retail Real Estate Is Thriving, But How?

Picture it, the year is 2023. Any and every item that can be bought sold can be accesses via the Internet from the comfort of one’s own home. For over seven years, the number of stores in existence has steadily declined. The economy is experiencing the perfect storm of rampant inflation and recessionary forces. Despite all of this, retail real estate vacancy nationwide is 5.4% and retail is thriving. Let’s take a look at why.

Savings Lead the Way

To understand movements in retail real estate, you must understand what’s happening in the world of retail. The Colliers Spring 2023 Retail Report does a great job of putting the retail market in context. To put it plainly, US consumers across the nation are unable to avoid the conspicuous elephant in the room—inflation. Faced with a decrease in the purchasing power of the dollar, consumers are searching for value and moving away from more expensive brands. These consumer choices are leading discount stores like Dollar Tree, Dollar General and Five Below to make serious investments in expanding their “brick and mortar” presence. These businesses are booming right now and depend on consumers who seek to save money on the margins. Such savings include visits to physical locations to avoid the shipping and processing fees associated with website purchases. In short, they are trading convenience for savings. The growth of these discount stores is outlined in the Talk, Business and Politics article on the expansion of brick and mortar real estate that can be found here and their expansion is easy to see in most metropolitan neighborhoods.

Adaptability Is Key

In addition to discount stores thriving, retail businesses in general have learned to become more adaptable. As the TBP article confirms, brick and mortar stores have now become the new business hubs for retailers that have a strong following online. Stores serve as locations for pick-ups, returns and exchanges. Many retailers, such as Walmart, Target and Nike currently follow this model. Gone are the days of the mega malls, which seem to have been replaced with their digital equivalents, but the need for physical customer service is still a very real one. In fact, store openings in 2022 outpaced store closings for the first time in six years, as outlined by Retail Dive here. Retailers who have been able to understand the changing needs of the consumer and the ever-evolving definition of the retail experience have thrived and those who have struggled to do so have failed, as evidenced by the recent floundering of Foot Locker, American Eagle Outfitters and the Gap.

Understanding the new face of the retail experience has also led to more individualized tailoring of the shopping experience by each brand. Rather than being lumped into a central commercial hub with various other stores and brands, competing for consumer’s physical attention, retail locations serve to be a confirmation of the brand’s online presence. Each physical location has the opportunity to enhance the connection of a consumer to the brand and many retailers have opted to tailor each individual location to the needs of their local consumers, as outlined in this Retail Dive article.

Supply and Demand Still Reign Supreme

To understand the thriving state of retail real estate is to understand the integral nature of retail properties and leases to the retail market. This is evolving state of retail, however, is affected by one other factor—construction. As outlined in Cushman & Wakefield’s Q2 2023 US National Marketbeat for Retail, raising interest rates have increased the cost of construction financing and building costs continue to remain high. These conditions have resulted in a continued slowdown of new retail construction. The lack of new supply, coupled with pent-up demand has led to low vacancies across the country. Given the current financial climate, it is important to recognize that though we are not seeing a frenzy in leasing and purchasing activities on the retail side, the continued functionality of retail real estate is a win in the present economy.

So, although retail today has a different look and feel from what it once was three to five years ago, it is thriving, and retail real estate is a great place to be. Retail properties are one of the few real estate property classes that offer direct participation in tenant revenues and they offer some of the most flexible and innovative transaction structuring that exists. In many ways, retail properties pay for themselves and are well worth the time and investment, especially in the current market.

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