Just What IS the Best-Performing Retail?

This is the third in a five-part series about the commercial real estate retail sector. The first two articles, “Understanding the Retail Sector: Where We’ve Been and Where We Are” and “Retail Economics: Supply, Demand and Consumer Dollars” are live.

Like most real estate sectors, “retail” consists of multiple parts. The neighborhood AutoZone, the corner Starbucks, the nearby independent Italian restaurant and the massive super-regional mall are all under the retail umbrella.

Given the broad category that encompasses retail, simply saying “retail is the darling of CRE investors,” “stores are doing exceptionally well,” or “bricks-and-mortar storefronts are on fire” is a large and vague generalization.

Connect CRE contacted multiple experts to clarify which retail subsector/subsectors are operating at their peak. An in-depth analysis demonstrates that, while most retail real estate performs admirably, there are degrees to that performance. Furthermore, those “degrees” extend out to mall performance.

Defining CRE’s Retail Space

Retail, sometimes known as “commercial retail,” is a space where goods and services are sold to consumers.

The International Council of Shopping Centers (ICSC) breaks retail into different categories, as follows:

• General Purpose Centers: Super-regional and regional malls, community centers, neighborhood centers and strip centers/convenience stores

• Special Purpose Centers: Power centers, lifestyle centers, factory outlets, themed/festival centers

• Limited-Purpose Property: Airport retail

The ideal retail space is near an active target audience or trade area, with plenty of foot traffic, high visibility and easy accessibility.

What’s Top Performing? It Depends

Retail space and usage vary. So do the responses as to what the best-performing retail space is.

The experts’ main consensus is that luxury and value retailers continue to thrive. “Luxury retail space is as strong as ever as evidenced by near-zero square feet available in The Triangle/Beverly Hills and the massive rebound of New York City’s best streets,” noted Chris Wilson, Executive Vice President and National Agency Retail Lead – JLL.

At the other end of the spectrum, the value brands – think Target, Dollar Tree, Burlington, Ross and TJ Maxx – “ are extremely healthy and seeking new locations,” Wilson commented.

Meanwhile, Matthew Hammond, principal of Coreland Properties, said he likes the smaller, targeted developments, like drive-through restaurants, car washes and gas stations. “Well-operated grocery-anchored centers remain the darling of retail,” Hammond added, explaining that such centers, with their strong co-tenants (including quick-service restaurants and beauty/spa services stores), remain strong despite economic and market headwinds.

The Providence Group’s Broker Darrell Palasciano agreed with Hammond’s and Wilson’s assessments, adding “fast décor” stores like Homesense and Hobby Lobby to the list of well-performing retail.

However, Palasciano’s colleague, Providence Group Principal Melissa McDonald, cautioned that in some “greener” markets, fast-casual restaurants could run into issues with too many seats. Specialty fitness concepts are also possibly taking a hit.

“Younger consumers tend to be more fickle with fitness and don’t establish as much loyalty with a specific brand,” McDonald explained, adding that while wellness concepts will expand, there could eventually be a downturn there as well.

Primestor’s Director of Leasing, Rhiana Lindsey, summed up retail performance by suggesting that successful retailers meet consumers’ needs. “In our portfolio, the retailers who are consistent and focus on a positive customer experience are seeing the strongest and steadiest sales growth,” she added.

Location Matters

Returning to McDonald’s comments about newer markets, retail performance depends on broad locations (full-fledged MSAs and states) and targeted ones (like submarkets). With this in mind, another consensus among the experts is that suburban retail is still growing strong while urban storefronts are coming back from the pandemic—but again, this depends on the geographic locale.

“For example, Silicon Valley or downtown San Francisco, which still are in a hybrid environment, still are slowly returning to normal in the urban cores,” explained James Chung, The Econic Company’s Founder and Principal. Meanwhile, Dallas and Orange County haven’t experienced much change, given those areas never really shut down 100% during the pandemic. “Moreover, you can see with your own eyes when you go to places like Fifth Avenue today in Manhattan, you would never know if it was 2024 or 2014,” Chung added.

Are Malls Really Dead?

MSC Principal Douglas J. Green said that multiple headwinds, including homelessness, crime and labor and construction costs, impact urban shopping districts. On the other hand, “urban cores generally boast fabulous density and a young, educated and impressionable consumer base that is, for the most part, a highly sought-after demographic for many retailers,” Green commented. Because of this, many urban shopping districts are doing well, partly driven by the lack of new space coming online.

Then there is the ongoing question mark about the status of those massive malls.

The “malls are dying” dirge began in the mid-2000s and gathered steam during the Great Financial Crisis. Close to a decade and a half later, malls are not so much extinct as much as they’re adapting.

Green explained that the disparity between “good” and “bad” malls continues to widen. “It’s the ‘A’ malls, then everything else,” he said. Regarding “everything else,” these properties suffer from the paradoxical issue of being half-empty while pent-up demand for space continues to sit on the sidelines.

“The issue is that today’s retailer is demanding a different type of product than these malls can provide—dynamic, outdoor, mixed-use environments with surface parking, not a tired, 50-year-old enclosed mall with deck parking,” Green said.

Chung agreed, pointing out that the 30- to 50-year-old enclosed malls could use rethinking and reimagining. “It might be the right time for a metamorphosis,” he observed.

McDonald also points out that the lack of retail space encourages a different view of certain malls, especially the less-viable ones. “I’m currently working on four or five redevelopments that include adaptive reuse or razing part of the mall to create an adjacent strip center,” she said. This will continue to be of strong interest, given the lack of new retail being developed right now.”