While Still Pessimistic, Retail Outlook Begins to Rebound

Allen Matkins
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Allen Matkins

[co-author: Rhonda Diaz Caldewey]

Following a continued decline into pessimism, retail may be coming back from the bottom of the cycle, according to the latest Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey. The current view is that retail properties will be generating lower returns in 2024 compared to the end of 2021, but it does not mean the absence of solid targeted opportunities. New housing developments, whether they are multi-family or single-family, generally require nearby retail. The booming housing market will continue to generate this demand. Though the Survey responses on the surface suggest a continued decline in new retail property construction, the trend has indicated a possible turnaround and a new cycle beginning before the end of 2024.

Retail market industry leaders, Rhonda Diaz Caldewey of JLL and Lee Edlund of Allen Matkins, discuss what lies ahead for this sector of the California commercial real estate market.

1. Retail has needed to drastically shift its development approach, even before the pandemic, but there have been successful dynamics that are keeping this market sector alive and well. What are those factors and what will continue to change moving forward?

Diaz Caldewey: Experience is the key driver of relevancy in retail centers. With the solid footing of omnichannel retail, tenants are looking for A locations primarily, along with fewer brick-and-mortar sites as part of their overall strategy. Retailers will look to — say — pick the best three when in the past it may have been a target of 10 in a given region. Smart landlords are investing in the development of upgrading the quality of their assets, or else they cannot compete in their market. B centers are either renovating to meet the competitive challenge or will soon be downgraded to a C status. With redevelopment and new development, outdoor trumps indoor demand. The outdoor urban village continues to evolve as these environments proved to sustain sales much better than enclosed environments.

Nationally, it’s a tenant’s market when it comes to retail centers. A different story, however, has unfolded for suburban villages and urban retail corridors where tenant demand started to pick up last summer, and has remained strong ever since. Overall, landlords are much more open to adapting their pre-COVID merchandising plan, or starting all over with a clean slate. Open to the newer retail concepts that are emerging, and working with an even more sophisticated online adapted consumer, developers are listening to the market intently like never before to capture a diverse and vibrant mix of retail.

Edlund: The survival of brick-and-mortar retail continues to depend upon customers’ desire for a social and emotional shopping and dining experience. Retailers need to continue innovating by offering in-person interactions supplemented by options to order online from a home computer or a mobile device. Consumers will be returning to some of the same restaurant spaces that they frequented before the pandemic, especially those that offer the option of outdoor dining. It just may be another establishment (and probably one paying less rent to its landlord) serving them.

2. What type of tenants – anchor tenants or otherwise – are developers and landlords looking to add to their retail centers that might differ from those 2-3 years ago?

Diaz Caldewey: Savvy owners are aware of the post-pandemic consumer psychology, and its lingering effect. Pre-pandemic, centers were already facing the decline of the department store, and weighing other uses to replace these large multi-level spaces. The pandemic accelerated a dramatic shift and openness to the future of what a new retail center means. Food and beverage remain active and nimble, despite the many challenges they continue to face. Plant-based concepts are gaining acceptance with increased concerns of the effects of an industrialized meat and poultry chain on the environment and otherwise. Ghost kitchens and delivery-only food concepts were emerging pre-pandemic, and with their models refined, they are active in the market. New wellness and health tenants are out in the market with showrooms that would have taken another decade to start to enter the mainstream space, such as vitamin drip therapy, home infrared light devices, and elite massage and circulation chairs that approach $30,000! Home hobby and entertainment continue to be strong, as is petcare. Auto-related showrooms in traditional retail centers expanded during the pandemic, and continue to do so, embracing a new model for electric car and scooter sales. Some new grocery that rolls out will be nothing more than a distribution center for delivery.

Edlund: The traditional department stores that have survived up to this point are drastically reducing their footprints. Retail center owners are needing to get both creative (where uses are concerned) and realistic (where rental rates are concerned). Anchor store locations are being repurposed for non-traditional uses, such as discount big box stores, grocery stores, fitness centers, and even distribution centers. A prominent indoor mall in the East Bay now boasts a DMV office among its tenants.

3. How is multi-family/residential development impacting retail development? Is the retail sector relying heavily on where new housing is being built?

Diaz Caldewey: Nationally we have seen very low levels of retail development for several years now. Most of the larger proposed and under-construction projects have been mixed-use with a retail component. The work from home — or near your home in an ad hoc home office — is here to stay, and unique housing product will grow in these environments once thought of only for vacation or retirement. Part of any large housing development will include walkable retail. Traditionally, retail follows rooftops, and that is something that the pandemic experience will not change. Overall, the U.S. is over retailed. Retail center development remains at a slow pace.

Edlund: The old adage “location, location, location” seems to apply to retail even more than other product types. Naturally, residential development is important to retail, especially grocery stores, restaurants, discount big box stores, and experiential retail (with the notable exception of movie theaters, which seem to face more tough times ahead). New housing developments in redeveloped urban areas and suburban areas present some of the few opportunities for new retail development, but do not offer much hope for existing challenged retail locations. Struggling urban retailers need not only residential consumers, but also a large influx of commuter traffic that will only materialize when the office sector fully returns to work.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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