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Strip Centers Climb Steadily Out of Pandemic Trough
Against the backdrop of the pandemic, the focus when it comes to the retail sector has often been on the often-severe impact that malls have withstood. How have properties in the more common, bread-and-butter retail real estate format—strip centers—been faring? Better than expected, according to Green Street.
A report from the Newport Beach, CA-based advisory firm says third-quarter retail sales were “surprisingly strong, despite consumer sentiment weakening. Wealthier consumers, and the eagerness to go out and return to ‘normal’ spending habits have overshadowed the impact of fast-rising prices, goods shortages, and health concerns. “
By merchandise category, spending on home furnishing and sporting goods continues to exceed 2019 levels by the greatest margin, Green Street says. Brick-and-mortar mortar retail sales remain robust, up 17% vs. pre-pandemic.
And contrary to the perception that Amazon and other online retailers are steadily eroding the market share of physical stores, e-commerce in Q3 represented 13% of overall retail sales, compared to the peak of 16% in Q2 2020 and 11% in2019.
Physical occupancy of strip centers reached the bottom in Q1 of this year after dropping about 250 basis points since Q4 2019. It increased by 20 bps in Q2 and continued to recover at a strong pace in Q3, when it rose by an average of about 30 bps, a rate that Green Street says is “largely in line with our expectations. “
Green Street’s forecasts call for about 30 bps of quarterly occupancy gains through year-end 2022, ending next year about 50 bps below pre-COVID levels. “This forecast is supported by an outsized volume of signed-but-not-occupied leases, an environment of minimal retailer bankruptcies that is expected to continue and generally higher-than-expected tenant retention rates,” according to Green Street.
Most recently, the emergence of a new COVID-19 variant, Omicron, has added “a heavy dose of uncertainty to economic growth forecasts,” Green Street notes. Retail stocks have plunged on the news, including strip center REITs, with share prices down approximately 6% since the variant was identified. “There are still major unanswered questions around the potential impact of Omicron and some concern is therefore warranted,” according to Green Street.
That being said, Green Street’s report notes that “a scenario of drastic deterioration of strip center fundamentals (widespread lockdowns, store closures, new rent abatements, etc.) seems unlikely, particularly given the experience gained by both consumers and retailers almost two years into this pandemic. Our base scenario remains a continued recovery of strip center fundamentals.”
- ◦Lease
- ◦Economy
