Retail’s Mixed (Shopping) Bag

The retail sector has had its ups and downs over the past several years. Between increase in e-commerce and COVID-19-mandated shutdowns, the industry has been on a roller coaster ride.

Q3 2022 national retail real estate data released by analytics companies and brokerage firms suggest that the rises and plunges might be starting to settle. But as is the case with most CRE sectors, a great deal depend on the product type.

Consumer Behavior

Part of the driving force behind retail’s real estate numbers are, of course, the consumers. On the one hand, it’s no secret that inflation continues driving prices. But this didn’t seem to exert downward pressure on overall spending.

According to Moody’s Analytics CRE: “Real disposable income and consumer spending remained largely unchanged from the last quarter.” Consumer confidence remained stable over the summer, per the University of Michigan’s Consumer Sentiment Index. Even as consumers began to pull back on purchasing activities, “service spending marches on,” Moody’s Analytics CRE said. “In-person shopping and dining continues its admirable performance.”

Meanwhile, CBRE’s U.S. Retail Q3 2022 report pointed out that “all but one retail category recorded year-over-year sales growth in Q3.” The lone exception was electronics and appliance stores. Even with this, “quarter-over-quarter results were mixed, with four categories recording declines,” The CBRE analysts noted.

Cushman & Wakefield’s U.S. National Shopping Center Q3 2022 report demonstrated another side, indicating that “the third-quarter data has confirmed that retail’s post-pandemic revival has not let up.” Shoppers want in-store shopping experiences which, in turn, supports retailer optimism, causing tenants to “continue to seek out high-quality store locations amid limited supply,” the Cushman & Wakefield analysts commented.

The Real Estate Factor

The retail sector encompasses many product types, with some outperforming others. According to CBRE, the “neighborhood, community and strip centers topped all formats in absorption for the eighth consecutive quarter.” At the opposite end, Moody’s Analytics CRE noted that while there was some stabilization, “regional mall properties continue to be the most at-risk retail subtype, according to our commercial mortgage delinquency data, and they are driving overall delinquency behavior among retail assets.”

Analysts from Green Street also sounded an alarm. “Financing has become difficult,” with national banks willing to become involved only when “compensated by hefty interest rates.” While CMBS financing is out there, higher interest rates of around 6% are “making deals yielding less than that difficult to pencil, unless one can comfortably underwrite meaningful growth,” Green Street observed.

The Outlook

Green Street pointed out that “conversations about tenant watch lists have heated up,” mainly in response to Regal’s bankruptcy and Bed, Bath & Beyond’s store closure announcements. Cushman & Wakefield also expressed concerns about potential cracks in resilient household spending, driven, in part, by negative wage growth, resulting from inflation. “Declining real income, dwindling savings, greater use of credit cards and higher interest rates may soon impact households’ ability and willingness to increase spending over the crucial holiday season,” Cushman & Wakefield added.

Yet there are some bright spots that could prop up the outlook. “Retailers have not materially pulled back their store opening plans yet, mitigating the negative choppy public markets and other macro news have had on the transaction market,” according to Green Street. CBRE analysts weighed in, forecasting a strong 2022 holiday sales season and an anticipated 6.9% sales growth forecast.

Finally, the Cushman & Wakefield analysts pointed to “generally healthy” retail sector corporate balance sheets and a lack of oversupply. As such, “our baseline expectation is that retail vacancy continues to tighten in the fourth quarter before leveling out next year, allowing growth in rental rates to moderate in tandem,” according to Cushman & Wakefield. “Despite the uncertain economic climate, retail CRE is at low risk of a major disruption over the next few years.”

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