In a recent episode of America’s Commercial Real Estate Show, the discussion delved into the evolving state of the retail real estate market. The featured guest, Xander Snyder, Senior Commercial Real Estate Economist at First American Economics, provided valuable insights into the trends shaping the retail sector, which remains a crucial part of the U.S. economy.
Retail’s Resilience and Consumer Spending
The conversation began with an overview of the retail real estate market’s resilience. Contrary to predictions of retail’s decline during the pandemic, the sector has made a strong recovery in many areas, although challenges persist for certain shopping centers. Snyder emphasized that consumer spending continues to drive the retail sector, but inflation-adjusted figures paint a different picture. When adjusted for inflation, retail sales growth has stagnated, signaling potential headwinds for the future.
Snyder highlighted the importance of separating nominal retail sales from real, inflation-adjusted sales. While nominal sales figures suggest growth, inflation has eroded much of this growth, leaving retail sales flat or even declining in real terms. He pointed out that rising credit card debt and increasing delinquency rates indicate that consumers may face challenges sustaining their current spending levels, especially in light of higher interest rates.
Retail Vacancy and Supply-Demand Dynamics
A critical point in the discussion was the impact of rising interest rates on the retail real estate market. While interest rates have affected all asset classes, Snyder noted that retail has been somewhat insulated due to limited new supply. The lack of new retail space, combined with demolitions of outdated properties, has helped keep vacancy rates low in many markets. Shopping malls, however, remain an exception, with vacancy rates steadily increasing since 2017.
Retail vacancy rates currently range between 2% and 5.5%, which is lower than many other asset classes. The limited availability of retail space has put upward pressure on rents, as tenants have fewer options. This dynamic has helped stabilize retail property prices, even as other commercial real estate sectors have faced more significant price declines.
Future Performance and Investor Opportunities
Looking ahead, Snyder predicted that retail rents might face pressure due to stagnating consumer spending, but the ongoing supply shortage will likely limit any significant declines. He expressed optimism for certain types of retail, particularly experiential retail—businesses that provide services or experiences that cannot be replicated online. These types of properties have proven resilient, and Snyder expects them to continue performing well in the face of consumer spending challenges.
Snyder also discussed geographic variations in retail performance, pointing out that suburban, car-dependent retail locations have fared better than urban core retail properties. He sees potential opportunities for investors in urban retail spaces, where prices have declined, creating opportunities for value-add investments.
Transaction Volume and Cap Rates
As for transaction volume, Snyder noted that retail, like most commercial real estate sectors, has seen a slowdown in recent years due to rising interest rates. However, he expects transaction activity to pick up as interest rates stabilize and buyers gain confidence in their underwriting. The show host and Snyder both observed that sellers have become more realistic about property values, recognizing that the low-interest-rate environment of recent years had inflated prices.
In terms of cap rates, Snyder expressed cautious optimism. He believes cap rates for retail properties are stabilizing and could even begin to decline as the market reaches an inflection point. This stabilization would provide a boost to property values, offering investors renewed confidence in the retail sector’s potential.
Distress and Development Opportunities
The discussion also touched on distress opportunities in the retail market, particularly in the shopping mall sub-sector. While Snyder doesn’t foresee widespread distress across the retail landscape, he does see potential for creative investors to capitalize on struggling mall properties by converting them into mixed-use developments or other innovative uses.
For new development, Snyder acknowledged that the high cost of financing and construction has limited new retail supply, but he sees potential for new projects in the future as the supply-demand imbalance continues. Developers who can navigate these challenges may find opportunities in markets with strong demand and limited retail space.
Conclusion
The episode concluded with a reminder that retail real estate remains a fascinating and resilient sector. Despite the challenges posed by inflation, rising interest rates, and shifting consumer behavior, opportunities abound for investors, developers, and tenants who can adapt to the evolving landscape. Whether through creative reuse of mall spaces or investments in well-located retail properties, the retail real estate market offers a dynamic and promising future.