The retail industry – including food, beverage, and online sales – generates over $6.6 trillion in sales each year. Although the pandemic has hit the sector hard, the retail asset class as a whole is beginning to bounce back.
In this article we’ll discuss what investors need to know about buying retail in 2020, and some of the best markets to find a storefront for sale and retail store for rent.
Historic Trends of Retail Properties
Prior to the global pandemic, the retail industry was robust and diversified. Consumer spending was growing and choices were expanding, thanks in part to a growing variety of commodity and specialty retail goods available both online and offline:
- While physical stores accounted for 90% of retail sales, ecommerce was growing by more than 15% per year
- Traditional and online retailers capitalized on omnichannel approaches to creatively reach customers
- Grocery-anchored product were the most desirable, with investors targeting core and value-add opportunities
- Power centers, neighborhood shopping centers, and outlet centers were also among the more attractive investments
- Trend toward shorter lease terms due to tenants reinventing themselves every few years and the rise of pop-up marketplaces
Impact of COVID-19 on retail investing
Although all commercial real estate asset classes have been impacted COVID-19, retail sales have been clearly been hit hard:
- Overall retail sales declined 8.1% in Q2 2020, the biggest drop since Q2 2009 during the Global Financial Crisis
- Essential businesses such as grocery stores and e-commerce posted year-over-year sales growth of 25% as consumers shifted buying habits during the lockdown
- Net absorption declined by 14.6 million square feet from the previous quarter, with neighborhood, community, and strip centers seeing the largest decreases
- Average retail net asking rent increased slightly in Q2 2020 to $18.09 per square foot, although power centers have been hit by 4% year-over-year rent declines
Future of the Retail Industry
Although experiential and pop-up tenants were a fast growing retail user segment pre-COVID, these are the exact same business models now most disrupted by the pandemic.
For example, service businesses such as gyms were once thought to be immune to ecommerce competition. Today, these same ecommerce-proof tenants will now likely see a portion of their clients stay with the home-fitness products and online classes taken up during the pandemic.
New normal for retail property owners
To be fair, there was talk of a “retail apocalypse” before the lockdowns began. While deferred rent negotiations between tenants and landlords are taking center stage, the fact is that many regional and national tenants aren’t in a distressed situation.
With that in mind, there are some new normals that both retail investors and users will need to face:
- Most restaurant and retail sales (with the exception of essential businesses) are lagging behind expectations
- Rent deferments are becoming the norm, although landlords should be realistic with expectations for tenants being able to manage higher rent payments
- Landlords who push too hard may find good tenants whose leases expire in the next two years taking advantage of better retail for lease opportunities
- Retail property owners need to make data-driven arguments for loan restructuring, including finding new solutions to work around CMBS loan covenants
Retail property use trends
It’s quite likely that retail property investor challenges and opportunities will continue to evolve, even after the pandemic runs its course:
- There’s large potential for repurposing vacant malls into health care armories or medical centers
- Demand for faster deliveries is blurring the lines between industrial and retail, presenting the opportunity for redevelopment to generate higher rents
- Conversion of retail into micro-fulfillment centers, warehouses or cold storage facilities may rise to meet the growth of ecommerce and online grocery sales
Fundamentals of Investing in Retail Properties
Although the retail sector isn’t recession-proof, there are some types of retail that perform better and retain value compared to other investments:
- Net lease single-tenant real estate such as convenience stores or gas stations can be safer retail investments during turbulent economic times
- National anchor tenants such as Walgreens, Dollar General, for free-standing 7-Elevens tend to be more insulated against the effects of ecommerce growth
- Grocery-anchored retail property often offers the opportunity to increase rents and drive occupancy to high levels
- Open-air shopping centers catering to affluent customers with tenants ranging from service to supermarkets also see high occupancy rates and rent growth
Retail Property Trends by Region
Retail property types range from single-tenant net leased property to urban storefronts, neighborhood shopping centers, lifestyle centers, and power centers occupied by big box retailers. Here are six states with the best retail investing opportunities:
Recent trends on retail for sale in Texas
Although economic activity has fallen, investors should keep an eye out for a convenience store for sale in Texas and, more specifically, business for sale in Dallas. Retail sales and service sector revenues are rebounding suggesting a less-severe contraction.
Recent trends on retail for sale in California
Ecommerce, along with essential businesses such as grocery and health care, are emerging as the most resilient in a soft retail market. Discount retailers in Sacramento produced the two largest lease transactions in Q2 2020, while four submarkets posted vacancy rates under 5%.
Recent trends on retail for sale in New York
Although retail rents have plummeted in New York City, retail remains an economic engine for New York State. Annual sales exceed $251 billion and New York’s retailers employ more than 941,000 workers throughout the state with a payroll of more than $31 billion.
Recent trends on retail for sale in Florida
Investors looking for a business for sale in Miami will be pleased to learn that Miami-Dade County retail fundamentals remain largely unchanged. Both net absorption and deliveries were at their 10-year highs, while vacancy rates remained flat and asking rents declined just 0.2% compared to last year.
Recent trends on retail for sale in Arkansas
Despite the pandemic, the real estate market in Arkansas remains strong. All segments – including residential, multifamily, and commercial – are seeing strong demand through the first half of 2020. The effect on retail space has been minor compared to a year ago, with single-tenant property such as gas stations for sale in Arkansas offering opportunity for net leased investors.
Recent trends on retail for sale in Oregon
Food distribution centers and essential retail businesses such as groceries and pharmacies are in high demand in Oregon because of the growth of ecommerce. In many cases, landlords and retail tenants are entering creative leasing negotiations by tying rent payments into sales revenue for specific periods of time.
Although overall demand for retail properties and rents will likely decrease over the next 12 months, some retail property types are bucking the trend. Single-tenant net leased properties such as gas stations and convenience stores, retail space that can be converted into industrial use to meet ecommerce demand, and vacant malls turned into medical care centers offer large potential and are experiencing increased investor demand.