So much for talk of a “retail apocalypse.” The surprising truth is we’re actually seeing a brick-and-mortar retail resurgence.
Since the Great Recession, retail real estate has displayed staying power and has the opportunity to continue to perform well based on market fundamentals. Consumers have put their finances back in order and household net worth is back to historically normal levels, according to the Federal Reserve and Bureau of Economic Analysis.
As the economy gathers momentum, Americans are well positioned to spend more. Additionally, new construction remains at generational lows, paving the way for rents on existing properties to increase. While prices for retail properties are no longer inexpensive, they continue to offer good value relative to other commercial real estate property types.
Close one door, two more open
A report from global research and advisory firm IHL Group found that for every retailer closing a store in 2018, two are opening locations, resulting in net growth of more than 2,000.
According to the IHL Group’s report, retail sales hit 4.9 percent in July 2018, a remarkably high growth rate for an industry that’s purportedly in dire straits. Growth in 2018 was so robust that the National Retail Federation had to revise its annual sales forecast upward. Initially it expected a growth in 2018 of 3.8 to 4.4 percent.
It is now anticipating a minimum of 4.5 percent growth. It could be a lot higher if conditions remain as strong as they are, the report shows. “Retail is growing faster than the rest of the economy at large, buoyed by a confident consumer and a strong economy,” according to the report.
Vacancy rates remain flat
Given the many store closures across the U.S., the minimal changes in vacancy rates show how the retail sector has withstood the structural changes in the industry. Vacancies have been flat for more than four quarters and retailers have become increasingly competitive when hunting for locations.
According to Commercial Property Executive, vacancy rates dropped slightly for retail markets year-over-year in the West (down by 40 basis points) and the Northeast (down by 10 basis points). On a national level, vacancy rates decreased by 10 basis points compared to 3Q 2017 and decreased by 20 basis points compared to the same period in 2016.
Vacancy rates for 3Q 2019 are projected to decrease in almost every region, dropping 20 basis points on a national level. Rates in the West are expected to decrease the most, down by 30 basis points, followed by the Midwest and the South (both down by 20 basis points).
Retail sales remain strong
Retail sales – excluding automobiles, gas stations, and restaurants – have grown year-over-year in all but one month since the beginning of 2010, according to the National Retail Federation. Through the end of 2018 and into 2019, retail is growing faster than the rest of the economy.
Fears that e-commerce will sound the death knell of traditional brick-and-mortar retail have been put to rest. Population growth and consumers’ penchant for recreational and other services, as well as necessity-based goods, will continue to fuel demand for physical stores.
Like all asset classes, a downturn will eventually come, likely when the economy suffers its next recession. But even then, if history is any guide, retail could hold up better than other real-estate sectors and possibly other asset classes.