Retail Rundown

by | 18 February 2021

  • The retail market faced negative net absorption of 27.6 million square feet in 2020, per CoStar. This was driven by record store closures, nearly 16,000.
  • Signs of recovery include positive net absorption in Q4.
  • Discount retailers (dollar stores, TJX brands), mass merchandisers (Walmart, Target), and home improvement stores (IKEA, Home Depot, Lowe’s) continue to expand.
  • Retail rent collections, suffering mightily in the early stages of the pandemic, had recovered to 86% by the end of the year.

The U.S. retail market faced substantial headwinds last year. Store closures reached nearly 16,000. The National Restaurant Association estimates an additional 110,000 restaurants have permanently closed, affecting retail centers across the board, from high street retail and malls to strip and power centers. The COVID-19 pandemic certainly hastened some of these closures, but landlords have been facing pressure in recent years. More than 23,000 retailers closed from 2017­–2019, per GlobalData.

Negative net absorption set a record in 2020, but in Q4, absorption turned positive, offering signs of a recovery. Limited new development has kept the vacancy rate from escalating faster. Rents, while down slightly, haven’t declined to the extent that dire news headlines would suggest. Pockets of strength remain in the market. Target, Walmart, home improvement stores, dollar stores, and discount retailers continue to perform well, as they offer products to a wide range of income brackets. More than half of new retail openings in 2020 came from discounters, per Coresight Research. Drugstores and grocery, too, have attracted strong capital flows due to their perceived safety.

Local policy is substantially affecting market performance. Large markets such as Boston, New York, Chicago, and Los Angeles had the most negative rent growth, while Southeastern markets such as Nashville, Tampa, and Orlando were among the top markets with positive traction. These differences will result in an uneven recovery and investment strategies.

Rent collections improved to 86% by the end of the year. While this was not quite back to the pre-pandemic 91%, it shows that tenants’ bottom lines improved. The U.S. has arguably been over-retailed for some time. Statista has estimated retail square feet per capita at 23 domestically, compared to less than five square feet in many European and Asian countries. CoStar’s estimate is higher at 35 square feet per capita. While this has been an ongoing theme for some time, retail has evolved, with entertainment-focused venues growing in recent years and social media driving traffic in stores and online. That suggests that the industry can and will adapt, even if it shrinks.

Ultimately, redevelopment opportunities will appear for underperforming assets. Whether a retail center is reinvented or a site is repurposed for alternative uses — think housing, healthcare, distribution — investors have high IRR plays ahead of them. Investors are returning to the market, as they are attracted by the risk-adjusted returns that retail offers.

About the Authors:

As Research Director | U.S. Capital Markets, Aaron Jodka is responsible for all aspects of research within the Capital Markets platform. He synthesizes and interprets a variety of data and information to stay ahead of trends that put our clients in an optimal position to make informed decisions. At the same time, he promotes the Colliers brand via best-in-class research reports, weekly insight posts, thought leadership, and contributions to numerous panels, media outlets, and industry events. With a deep understanding of markets throughout the country, he provides a unique perspective on market dynamics across asset types and investment strategies, providing clients with tailored data and analytics to ultimately guide decision-making solutions.

As a Research Analyst for the National Marketing & Research team at Colliers, Nicole Larson is responsible for responding to and resolving various national inquiries from researchers and professionals across the country while leveraging and connecting available research resources. She collects and provides analysis related to CRE and the economy across all service lines. In addition, she has experience compiling market research into internal newsletters, presentations, training sessions and other research deliverables.