10/15/2020 | By Calvin Schnure
The three most important factors in real estate—location, location, location—all apply in the retail market. Retail properties in areas with little job growth and lower incomes have been most affected by the e-commerce trends over the past half-decade and remain most exposed in the period ahead. Locations with growing populations and higher incomes, in contrast, have fared better, with rising rents and high occupancy rates in the months prior to the pandemic.
The performance of retail properties in different locations will continue to diverge in the months and years ahead, and the fortunes of retail properties will vary according to the quality of the property and the geographic considerations discussed above. Lower-quality malls have in many cases lost anchor stores and suffer from declining occupancy. Some of these may be closed or redeveloped to other uses, including logistics, offices, and multifamily. Higher-quality properties, in contrast, have continued to attract shoppers and provide an engaging shopping experience. Most retail properties owned by REITs are newer, higher-quality properties in the more rapidly growing markets.
The effects of the pandemic on retail property markets come on top of structural changes that were already underway due to the growth of e-commerce. Some of the impact of the pandemic has been to accelerate these pre-existing trends. There will, however, also be longer-term changes that had not been anticipated prior to the pandemic.
Bricks & mortar retail can still coexist with e-commerce, as the choice of in-store sales outlets and online purchases is not an either/or proposition. E-commerce is a vital channel for meeting the needs of many shoppers, but retailers have found that online sales tend to fall in areas where they close a physical store location. Curbside pickup is another variant of the hybrid online/physical store model that has surged in popularity during the pandemic. The most successful retail models in the future will likely combine both physical and online stores for searching for products, price comparison, size and style and fit, and returns.
There are factors in the plus side in how retail properties are adapting to the COVID-19 environment. Retail was one of the first parts of the economy to implement new measures to reduce risks of transmission in public spaces, including directing traffic flow; touchless payment with barriers for cashiers; greater distances in toilets; food courts closed for now; more frequent cleaning.
In addition, rent collections among free standing retail and shopping centers rose from June through September as malls and shopping centers reopened (see REIT Industry September 2020 Rent Collections). As shops and malls continue to reopen, retail properties and retail REITs are likely to strengthen.
This is a selection from the Nareit Fall 2020 Economic Outlook, which analyzes the current state of commercial real estate markets, as well as potential longer-term structural changes that are evolving during the pandemic. See the full outlook for a discussion of other major commercial property sectors.