HOW RETAIL IS REBOUNDING AGAINST ALL ODDS
More than sixteen months following the beginning of the COVID-19 pandemic in the United States, I still find myself often thinking about those first days of lockdown. Over the course of one cold, overcast afternoon in March, I went from enjoyingccatching up with a colleague over to reading an email from my boss stating the office would close for “two” weeks and frantically driving to the office to grab my laptop while I still could.
However, as our quarantine timeline began to increase, just as most of you did, I started to feel a growing concern for how long it would be before life returned to normal, additionally what impact an extended lockdown would have on the world of retail. Less than two months later, it was clear that the sector was in serious trouble. In April 2020, only 56% of retail tenants paid their base rent, compared to 91% rent collection the prior month. With the vast majority of non-essential businesses closed nationwide, tenants, landlords, and lenders alike scrambled to find ways to navigate unchartered waters. The movie theater industry requested a federal government bailout as studios halted film production and circulation. 24 Hour Fitness and Gold’s Gym both filed for bankruptcy, permanently closing a combined 130 locations. Meanwhile, online shopping increased more than 32% year-over-year to a total of $791 billion in 2020, or 14% of total retail sales (up from 11% in 2019).
As states began to reopen, an economy dampened by lockdowns, closures, and travel bans emerged eager to spend. Consumer spending as of June 30, 2021 had already soared 18% over pre-pandemic levels. Restaurant spending, which saw a 55% decrease during the height of the pandemic exploded to an all-time high of $67.3 billion for the month of May 2021.
This increase in consumer spending has naturally translated to an accelerated rebound for property owners. Q2, 2021 was the second straight quarter of positive net absorption, totaling 5.5 million square feet. In addition, retailers signed leases totaling more than 50 million square feet in Q1 2021, which is tracking almost on par with 2019 levels. Malls and power centers have lagged with negative net absorption; however, that performance has been offset by freestanding, strip, and grocery-anchored retail centers. Grocery-anchored retail vacancy remains low with a national vacancy rate of 4.2%. CoStar predicts a full recovering of pre-pandemic rents for retail in 2022, following a strong first half of 2021.
This rapid rebound is great to see, but maybe these gains that we are seeing today are short-term, driven in part by PPP loans and continued unemployment benefits. Retail can’t be that strong, can it? While I will admit we are not entirely out of the woods just yet, the pandemic was in some ways an unlikely catalyst for a fundamental change within the retail sector. Grocery stores that had moderately successful delivery programs prior to the pandemic saw a soar in online grocery shopping that shows no signs of going away. In 2018, 48% of grocery shoppers in the U.S. used online ordering for at least some of their grocery purchases. During the pandemic, this number rose significantly to 74%, with current estimates for usage in 2023 forecasting that 70% of grocery shoppers will use online grocery shopping. And unlike many other e-commerce platforms, services such as Instacart rely heavily on in-store purchasing in lieu of shipping from a warehouse. Malls, which saw declines even prior to the pandemic, have seen an accelerated rate of redevelopment that often includes a variety of uses. According to a recent CoStar survey of mall redevelopments in the US, 86% of the subject properties had added a multifamily component and 51% adding an office component, commanding higher rents and driving higher property values.
There is no question that the retail landscape has been forever changed by COIVD-19. But if you can block out the noise and look at the statistics, you will see this segment is resilient against all odds. Retail isn’t dead, it’s evolving.
Executive Vice President, Leasing