Contact Us December 14, 2020
The retail market of the U.S has been severely affected due to the Covid-19 pandemic. And is continuing to withstand a high degree of disruption amid the global crisis. The brick-and-mortar retailers were already distressed with the widespread use of e-commerce. On top of it, there are several concerns regarding the introduction of augmented technology and high-level contenders like Walmart. As a result, numerous retailers were forced to close down their businesses for an extended period. Naturally, this led to widespread suffering among them who didn’t have a rigid omnichannel strategy.
A Turnaround in E-commerce Sales Growth
According to reports by CBRE Research, U.S. Census Bureau in September 2020, the total retail sales growth which was 4.5% at the beginning of February, fell to -5.6% by the end of March. Followed by an astonishingly -19.9% by April. The market began to recover, reaching a positive margin of 2.2% by June. By September, it reached 5.2%. With lockdown being strictly followed, the total retail sales growth drastically fell to negative in February. The sales growth then resumed back around June with the surge in online shopping and reopening of retail stores. Although the growth of e-commerce was dramatically rocketed this year, it doesn’t necessarily imply that it will keep being on the rise. Online shopping comes with functional and profitability hindrances regarding shipping and logistics. Also, brick-and-mortar shops are preferred by customers for providing the physical experience and greater engagement. The epic pandemic-powered growth this year has started to stabilize. CBRE Research is predicting that the growth rate of e-commerce will slow down in the year 2021, for the first time after 2008. According to the U.S Census Bureau predictions, the growth rate will resume in 2022 at a decent pace.
Bankruptcies and Store Closures
The closure of retail stores in 2020 and 2021 each will exceed 2019’s record, according to the International Council of Shopping Centres (ICSC) . Retail bankruptcies in the pandemic’s first eight months have nearly surpassed that of 2008’s Global Financial Crisis. Most of them are a result of Covid-19-related misfirings of structurally declining categories. The new retail businesses will soak up some of the voids left by failed businesses. Different digitally domestic brands, health brands, automotive showrooms, service centers, salon brands, pet franchise, and so on will exploit opportunistic market conditions. Convenience stores, grocery stores, and quick-delivery restaurants will also surge undoubtedly. Increased availability of prime second-gen space, decreased rental rates, and landlords offering concessions and covid-19-related protective measures will direct lease transactions in 2021.
Adaptive Reuse and Conversion
By 2025, the U.S total retail real estate inventory will reduce by 20% from the current level, reported by ICSC. This will be a result of large-scale adaptive reuse and conversion, starting from 2021. Especially among class B and C malls who have been the most affected by failing departmental shops and apparel retailers causing joint-tenancy exposures. Malls now will require a strategic assessment for the best use of the land and demand for adaptive reuse and conversion. Though the rapid-growing conversion class is retail to industrial, adaptive reuse to multifamily, office, and hotel categories will still be feasible on asset-specific categories. Independent big-box retailers will increasingly prefer accession of mall sites for redevelopment, with affordable pricing on prime locations. By overcoming intricate regulatory matters, successful adaptive reuse and conversion can be achieved. Along with it, increased flexibility in municipal zoning, with departmental store collaboration granting permits and changes to mutual easement agreements allowing redevelopment. Some local jurisdictions may also help in financing for these redevelopments, to skip any further loss of retail uses and sales tax revenue.
Investment Bifurcation
Investors will carefully invest in retail properties in 2021 due to instability in rent rolls and lack of net operative income. This is making it difficult to evaluate the value of retail properties. Due to this, investment was stagnant in 2020 and will remain the same until increased income and pricing transparency. A clear bifurcation is expected between property types and markets. Solo-tenant net-leased properties, suburban areas, and grocery centers are likely to remain resilient. The ones facing the most occupancy declines are malls and urban retails. Institutional investors will remain non-interested in invested unless quality core assets.
Markets to Contemplate
There has been an obvious bifurcation between suburban and urban-core markets regarding customer spending, retailers’ conduct, and market flexibility. In urban markets like New York, recovery is much uneven where demand directors are at a disadvantage, while suburbs are in a way to recovery. Markets that will benefit from faster space occupancy, greater inward migration, and enhanced capacities from outdoor space and open-air malls are the secondary cities like Sun Belt, Denver, Phoenix, Austin, etc. They will encounter lesser rent declines and there is a greater potential of adaptive reuse and conversion, based on market capability.
The global pandemic has forever changed customer’s expectations and feasibility concerns are continuing to restructure the retail landscape. It has exacerbated the toll on traditional retailers, even resulting in permanent closedown of around 25,000 or more retail shops by 2020. Not only smaller stores, but few significant brands have been reported of bankruptcy and subsequent closures.