Current State of the Retail Industry

Introduction

The current state of the retail real estate industry is nuanced as there are diverse asset types with different positions in the market. For this article’s purpose, I will focus primarily on shopping centers in suburban environments and the evolution this asset type is undergoing.

History

How did the shopping center industry get where it is today? From the end of World War II until the Global Financial Crisis (GFC), developers continued to produce retail space in suburban markets. During this period, there was an influx of migration to the suburbs and the development of infrastructure, retail, and single-family homes. Historically, it has been shown that retail follows rooftops as it was attractive to bring shopping closer to consumers. Shopping centers have become oversaturated throughout the last decade as supply and quality cannibalized the market which has led to forced evolution. More recently, this led to shopping centers being repositioned or demolished for another use. Currently, it is estimated that the retail industry is still oversaturated by 1,100 properties. There have also been numerous market disruptors such as e-commerce and Amazon’s influence on consumer shopping habits.

Industry Trends

Before the Covid-19 pandemic, retail was dealing with an accelerated evolution of the industry, which came in the form of e-commerce and Amazon. In Q4 2019, e-commerce sales accounted for 11% of total retail sales and rose to 15.7% during 2020.

After this peak, e-commerce sales dropped back down to 12.9% by Q4, 2021. Online sales decreased steadily by March 2022 to their near pre-pandemic rate. This shows that consumer purchasing habits have reverted to their pre-pandemic methods. Online shopping has increased the evolution of consumer spending habits but has not fully replaced the in-person experience as expected.

Shift in Consumer Spending Habits

This shift of consumer spending habits has led to a notable number of national tenant bankruptcies. As a reference, during the period referred to as the retail apocalypse, which is from 2015 to the present day, at least 148 notable retailers went bankrupt. Throughout this list of retailers are brands that were pigeonholed into specific niche items or did not evolve accordingly to compete with market disruptors and new consumer habits. Throughout 2023 so far, we have seen Bed Bath & Beyond, Tuesday Morning, and Party City on the verge of filing for bankruptcy by February. The retailers that have survived this wave of bankruptcies have reinvested in their products to match modern consumer demands. Additionally, digitally native brands have begun to expand into brick-and-mortar stores following strong online sales. Examples of this are Warby Parker, Allbirds, and Bonobos. Overall, similar to the shopping centers they occupy, retail tenants must adapt their brand and product to match modern consumer demand.

Retail’s Role in the Market

Retail properties near new multifamily developments create an attractive environment for businesses to thrive.

As multifamily remains a very attractive sector for a variety of reasons such as widespread housing shortages, affordability concerns, and a shift in consumer patterns, this will only bolster retail. The addition of high-density housing to communities will drive traffic, additional discretionary income, and jobs which is positive for retail to thrive. For example, the influx of people will require a grocery store, nail salon, dentist, and so forth. Similarly, the implementation of hybrid work schedules helps community shopping centers as it will drive the daytime traffic during the week which did not exist pre-pandemic. Shopping centers play a vital role in the real estate food chain as it is supplementary to other uses such as office, multifamily, and hotels.

In some instances, retail developers will incorporate a mixed-use component in the project to create their own traffic drivers. This has created a new sub-sector of shopping centers referred to as lifestyle centers.

Factors of a Modern Shopping Center

A modern shopping center will include a mixed-use component or be located near high-density housing. Tenanting a modern shopping center is also an important factor. Modern tenants encompass the five f’s of retail which are fashion, fitness, food, fun, and furniture. I would also add to this medical, which typically includes urgent care centers and dentists. These are tenant categories that are unable to be replicated through an online experience. In a post-Covid-19 environment, an increase in personal healthcare has led hospitals to increase their footprint in shopping centers. This alleviates the burden on medical campuses by developing facilities closer to the consumer and driving daily traffic to these exterior urgent cares or micro medical centers.

Lifestyle centers are the total opposite of the traditional regional enclosed mall that has been at the forefront of the industry for many years. The goal of a lifestyle center is to bring an open-air component and in most cases, mixed-use while being centrally located in the market. Lifestyle centers will drive traffic from residents that are on-site daily, the community who have walkable and drivable access to the site, and organic traffic from common area activities and weekly shopping visits. The outdated business model of an enclosed regional mall where people are destination driven is beginning to shift. Either lifestyle centers are ground-up construction or in some instances, are born through the conversion of regional malls.

Conclusion

Is retail real estate and the traditional in-person shopping experience dead? No, it is undergoing a transformation that is fueled by reinvestment into new tenants and property types such as lifestyle centers. Retail has and will remain a major proponent of western society for the foreseeable future. The brick-and-mortar experience has shown to supplement the online shopping platform, not be replaced by it. Online shopping is another tool in a retailer’s toolbox and when a brand invests in its product/store experience it can create a harmonious synergy for shoppers. This revitalization of investment in the brand will help landlords improve the quality of space and tenants to provide a unique experience through the modern open-air mixed-use component.

When analyzing retail as an asset class, it is important to focus on each sub-sector rather than the broad category as regional malls are in a different place than grocery-anchored centers. Overall, retail has recently undergone growth pains that are associated with rapid expansion. However, this will only strengthen the position of the properties and tenants that are able to evolve and adapt.