The retail market’s recent recovery from the lows of 2020 has been one of the bright spots of the year in the real estate industry. After mandatory shutdowns due to the pandemic led to large numbers of businesses, both large and small, closing their doors for good, many wondered how the retail sector would recover. But the industry has found its footing, even amid rising inflation and with consumer confidence hitting a 10-year low.
In the first half of the year, rents for retail space increased significantly, and vacancy fell to a 15-year low, according to Cushman & Wakefield data. Meanwhile, economic growth rebounded over the summer as GDP rose 2.6 percent in the third quarter, a comforting sign that the country may not yet be in recession. However, retail economists and experts have a subdued outlook for 2023 amid market uncertainty and retailers focusing on profitability.
While consumers have recently been more cautious about spending in the face of inflation, they are still spending significantly. A National Retail Federation (NRF) survey found that this year’s Halloween season spending in the US is expected to reach a record $10.6 billion, surpassing last year’s record of $10.1 billion. Although the official figures on Halloween spending have not yet been released, those surveyed said they will spend an average of $100 on Halloween candy, decor, cards and costumes. Estimated spending on the so-called “spooky season” fell to $8 billion in 2020 and is now back, and higher, than pre-pandemic levels.
Holiday retail sales are expected to rise this year as well, despite all the economic challenges facing the country. Like last year, holiday season shopping is starting earlier than usual, and a higher amount of foot traffic at retail centers was expected in October, according to a CBRE holiday retail sales forecast. The brokerage estimates that retail sales will rise 6.9 percent from last year to $1.48 trillion in the fourth quarter of this year.
While sales are expected to rise, the industry will continue to be challenged by a tight labor market. A shortage of seasonal workers may reduce store hours over the holiday season as jobs open, and resignations are still above long-term averages. CBRE chief economist Richard Barkham said retail has been surprisingly resilient and is in the midst of a post-pandemic revival, “all the companies that failed during Covid have restructured and come back strong.”
The ongoing narrative about dying malls is also starting to turn, at least for some malls. Last week, the CEO of the nation’s largest mall owner, Simon Property Group, touted the return of brick-and-mortar retail in his company’s third-quarter earnings call. Simon, which owns 230 malls in North America, Asia and Europe, posted strong numbers in the third quarter, with the most notable increases in its average base minimum rent, which rose from $53.91 last year to $54.80 this year , and occupancy at its properties, which rose to nearly 95 percent, an increase of 1.7 percent from the same period last year. “I don’t need to remind you that when physical retail was shut down in COVID, all the naysayers said that physical retail was gone forever,” Simon said. “However, brick-and-mortar is strong, brick-and-mortar retail is strong, and e-commerce is flat-lined.” The latest figures from the Census Bureau show that e-commerce sales reached 507.7 billion in the first half of 2022, an increase of 6.8 percent from the same period in 2021.
So, while the retail market is mostly on solid footing for now, there is cause for concern about low consumer confidence going into 2023 and its impact on the industry. According to JLL, retail sales softened globally during the third quarter, with retail sales expected to slow further through next year in most of the country’s major markets. Small and large retailers have laid off workers in recent months to cut costs amid slower sales. In light of this, some retailers and proptech companies are finding ways to get people to shop. One is a new emphasis by retail developers on using outdoor spaces to enhance shoppers’ experiences at retail centers.
At a panel during ULI’s annual Fall Meeting late last month, panelists explained that a fresh approach can be a big differentiator. “You have to find that unique angle—something that’s memorable,” says Steven Levin, founder and CEO of Centennial Real Estate, suggesting that owners and developers take the roofs off retail centers, add and bring in outdoor theaters and fountains. high profile art exhibitions. One panelist even suggested tapping into the multifamily trend of adding Pickleball courts to properties. Adding more experiences to retail stores has been a growing trend even pre-pandemic, spawning the term “experiential” retail. And it seems to be popular with buyers. A study from Westfield found that by 2025, nearly 60 percent of shoppers expect retail stores to devote more than half of their space to experiences rather than products.
To support retailers struggling to make rent, the nation’s largest retailer, Walmart, has partnered with an online pop-up shopping platform to rent space to small businesses inside its stores on short-term leases. Using the online marketplace Popable, brands can sign up to leases from one month to one year, with the option to sign a longer-term contract. Retailers are also increasingly using AI to run their businesses. Beauty retailer Sephora is using AI technology that scans customers’ faces and recommends makeup colors and options, while home improvement brand Lowe’s is deploying robots called “LoweBots” in its retail stores to walk around and help customers find what they need.
Among the challenges retailers face is the unpredictable and uncontrollable factor of weather, which can play a role in affecting holiday retail sales. Not only has unseasonably warm weather affected sales of coats and sweaters, but according to the NRS, energy costs for heating and electricity are expected to be higher and could ultimately push up inflation and cut into holiday spending. On the other hand, natural gas prices have fallen more than 40 percent, while holiday travel is expected to be higher this year and could boost retail sales.
While there is still much uncertainty about how economic conditions will affect real estate markets going into 2023, higher-end retail centers continue to outperform older or lower-quality retail space. Owners and retailers will need to maintain their focus on profitability and balance between online and brick-and-mortar stores and continue to look at ways to improve the in-person shopping experience.
The retail industry experienced perhaps the most difficult period in history during the lows of 2020 as stores were forced to close their doors and sales at brick-and-mortar stores fell. But some retailers have found a way and learned how to adapt to situations like the global health crisis and forced closures. With that experience under its belt, the battle-tested retail industry is arguably better prepared to weather the downturn.