Retail Real Estate in U.S Sees the Biggest Revival in Years

BY Realty+

Bricks-and-mortar store owners are emerging from the pandemic with surprising strength, posting some of their best numbers in years and plotting expansions as more Americans venture out to buy things again.

U.S. retail vacancy fell to 6.1% in the second quarter, the lowest level in at least 15 years, while asking rents for U.S. shopping centers in the quarter were 16% higher than five years ago, according to real-estate services firm Cushman & Wakefield.

The retail real estate industry’s turnaround reflects a wrenching, decades-long adjustment that included hundreds of retailer bankruptcies, widespread vacant storefronts and plummeting demand for enclosed malls. Over the past dozen years, construction of new retail has slowed significantly after many years of overbuilding.

Instead, most developers are opting to renovate outdated properties rather than build new ones. Those that do embark on new projects are more cautious, usually securing leases from tenants before breaking ground. More and more companies that started as online-only retailers, like Warby Parker Inc., are also turning to real estate to attract customers and boost growth. The eyeglass retailer opened nine new locations in the second quarter, bringing its total at the time to 178 stores. 

And after being forced to buy more things online at the start of the pandemic, many people have decided they like shopping in stores for items ranging from clothing to groceries, in a reassuring sign for the staying power of bricks-and-mortar retail.

Other real-estate sectors still suffer from oversupply. Most notably, the office market is struggling with a glut of workspace that has been aggravated by the pandemic and the rise of remote work. It will likely take years for supply to shrink to fit the post-Covid-19 level of office demand, some property analysts said.

After its own painful reinvention, retail real estate is now benefiting from years of minimal construction as companies that survived the challenges of online shopping and the pandemic look to expand.

“For the first time in almost five years now, we’ll have…more new stores opening in the U.S. than closures,’’ Brian Kingston, Managing Partner at Brookfield Asset Management, said, “And these net new 2,600 stores will require an estimated 23 mn sq ft of space.”

The real-estate firm, which is one of the biggest mall owners, said that spending at its 132 U.S. malls is 31% above pre-pandemic levels. While many middle- and lower-quality malls are still struggling, operators of high-end, Class A malls—such as Brookfield, Simon Property Group and Macerich Co.—have seen occupancy rates recover from pandemic dips to more than 90%, according to the companies and Morgan Stanley.

High inflation, rapidly rising interest rates, and the prospect of recession could undercut retail sales and cause vacancies to increase in the months ahead. Retail’s strengthening performance during the pandemic, however, indicates the industry is more capable than it has been in years of weathering coming storms, executives and analysts said.

“Coming out of Covid, our foot traffic and sales across all of our properties have increased, even above pre-Covid levels,” said Chad Cress, Chief Creative Officer for California-based DJM, a real estate investment, development, and management firm.

The U.S. now has nearly 22 sq ft of retail real estate per person, according to data provider MSCI Real Assets. Morgan Stanley calculates an even higher number of 23, more than any other country and more than double the per-capita square footage of France and the U.K.—and nearly eight times China’s rate.

As Americans moved to the suburbs after World War II, downtown shopping corridors dominated by small businesses and family-run department stores gave way to regional malls and retail chains, said Nick Egelanian, Founder and President of retail advisory firm SiteWorks. Later, developers rushed to build sprawling, open-air shopping centers with big-box stores.

Tags : owners US retail vacancy Cushman & Wakefield real estate services firm developers Brian Kingston Managing Partner Brookfield Asset Management Chad Cress Chief Creative Office DJM