The State of Retail | Spring 2021

There are a number of questions that we often hear in the retail commercial real estate realm. How has the pandemic affected retail assets? How have rents been affected? Who was able to expand their business, and who was hit the worst? What does the future look like regarding retail investment sales and leasing? We know, we know - that seems overwhelming. Luckily, we’ve got the answers you’re looking for.

Let’s take a look at what has occurred in the last 12 months in retail investment sales. The first quarter of 2020 seemed promising – in terms of sales volume and the presence of generally stabilized retail assets. The second and third quarters were poor, as expected (Thanks, 2020). The fourth quarter was more robust; but still only at 62% of the average volume over the last three years. Although this was a difficult time for investment sales, there is some good news - it was still more annual volume than in 2008 and 2009 during the height of the Great Recession.

One type of retail asset that outshined the others was single-tenant, triple net leased properties with secure income streams. So, what kind of a tenant is seen as one that provides “secure cash flows” during a pandemic? Answer: tenants offering “essential oriented” products or services in properties such as those occupied by groceries, banks, and pharmacies. Other winning tenant types would include home improvement stores, fast food restaurants, sporting goods stores, pet stores, and discounters that also flourished. Some examples would be Dollar Tree, Dollar General, TJ Maxx, Target, Walmart, Walgreens, and Chick-fil-a. Multi-tenant retail strip center assets with “essential-oriented” co-tenants and/or anchors fared relatively well and were a second favorite asset to be traded by investors. Restaurants, experiential retail, traditional department stores, and retail clothing stores have been the hardest hit and contribute greatly to the rise in vacancy rate (currently 5.1%), negative rent growth (-.6%), and negative net absorption (- 29.5M square feet). Again, thanks, 2020.

How have rent collection and lease rates been affected during the pandemic? Consumer mobility and foot traffic have diminished considerably, leading to retailers experiencing reduced revenues. Many retailers have had to shutter amid the financial stress and landlords have scrambled to work with tenants that are having difficulty paying rent, using strategies like rent deferrals and rent restructuring. Costar reports that rent collections were as low as 50% in April and May and that 20% of tenants are still unable to meet their contractual rent obligations. Now for a positive stat: assets that had “essential-oriented” tenants reported closer to 90+% of rent collections throughout the pandemic.

How does all of this affect pricing for sales? The increases in vacancy, negative rent growth and decrease in transactional velocity may result in another 10+ basis point increase in cap rates. The past 12-month market sale price per square foot only rose .2%, and some models predict a 3-9% reduction in pricing before we begin to see recovery in mid to late 2021.

But it’s not all doom and gloom, we promise. The construction pipeline for new retail space is relatively low. Pre-pandemic aging and underutilized retail spaces are being converted to non-retail purposes such as distribution, warehouse, and fulfillment centers, which will set the stage to increase demand once we are clear of the pandemic. With necessity comes innovation! Changes in retail culture are already evolving. Over the last three quarters, 42,000+ new leases have been executed, spanning over 126.5 million square feet. Retailers are changing their modeling and choosing smaller leases and smaller building footprints to increase the profitability of stores. Former dark shopping malls are slated to be repurposed for mixed uses such as retail, office, and affordable housing, due to increasing density. Big retailers are adapting to compete with e-commerce by creating “buy online, pick up in-store” models. Restaurants have honed in on improving systems for curbside pickup, and utilizing the “ghost- kitchen” model to save on expenses. Adaption can be found everywhere.

Retailers, Developers, and Investors need to rely on high quality information more than ever to stay ahead of the trends and optimize returns on their respective investments.