As the coronavirus pandemic heavily impacted commerce, we witnessed retailers and consumers quickly shift their habits and strategies to conform to a new world of shopping in 2020. At the peak of the lockdown, almost 62% of all physical shops in the U.S. were closed, amounting to nearly five billion square feet of floorspace temporarily being taken out of action. The U.S. retail market saw negative 29.1 million square feet of space absorbed in 2020 as many retailers closed their physical locations and looked to streamline store counts and decrease their physical footprint. The vacancy rate stood at 5.0% at the end of the year for retail assets, increasing 50-basis points year-over-year. However, vacancy is still significantly lower when compared to the previous recession, where it averaged 7.1% in 2009.
After several years of brick-and-mortar retail migrating toward experiences and services, the online channel shifted its focus back to products with less shopping, more buying. The shift from services to goods backed the sentiment that retail spending held up much better than expected in 2020. Retailers who acclimated to digital commerce were met with success as nearly 150 million people shopped online for the first time and accelerated trends expected within the next few years to happen overnight. Although store retail sales growth was in the negatives, major online sales growth boosted total retail sales to 2.2% by the end of 2020.
3 Things to Watch in 2021
- The Retail Landscape Transformation
- We will continue to see more and more retail properties re-purposed into the new year as the pandemic has accelerated the development of the types of spaces Americans actually need. Currently, the U.S. is over retailed with an estimated 23 square feet per person compared to places like France, Germany, Japan, and the United Kingdom, which average less than 5 square feet per person.
- E-commerce Will Gradually Cutback
- Online commerce was thrust into the forefront at the peak of the pandemic as many brick-and-mortar shops were forced to close due to coronavirus restrictions. Though online sales grew by more than 30% in 2020, we anticipate e-commerce sales in 2021 to contract by 8% as physical stores reopen and allow for more in-store purchases.
- Omnichannel Retailing Leads the Way
- Retailers will continue to offer multichannel options to consumers in 2021, strengthening the place of stores in the retail ecosystem, not just as places to sell but as locations to fulfill and service online demand. Additionally, social commerce will become more prevalent as retailers reach new audiences via TikTok, Facebook, Instagram, and Pinterest.
2021 Vacancy Outlook
The vacancy rate for the U.S. retail market stood at 5.0% at the end of 2020, rising 50 basis points from the prior year. The rise in vacancy comes as no surprise as nearly 16,000 retail stores closed in 2020 due to the coronavirus pandemic, easily surpassing the record-setting 9,879 store closures in 2019. It was also reported that more than 110,000 restaurants closed permanently across the country in 2020, representing one in six U.S. eateries.
We anticipate vacancies to continue to rise across the U.S. over the next few years as the retail market grapples with the pandemic’s impacts. Construction is currently down 25% from the year prior, with 48.8 million square feet of retail under construction. Mall vacancies are expected to be hit the hardest as tenant demand is weaker than outlets and strip centers. Backfilling will also be a challenge and lower-rent-paying temporary tenants may be needed to preserve occupancy.
2021 Absorption Outlook
While net absorption spent most of the year in the red, the U.S. retail market showed significant improvement in the fourth quarter of 2020, absorbing 3 million square feet of space. Overall, the U.S. retail market ended 2020 with 29.1 million square feet of negative space absorbed. This is the largest amount of negative absorption that the U.S. retail market has seen over the past 15 years, even beating out the Great Financial Crisis’s absorption figures.
Absorption will likely remain negative in 2021 as the retail market recovers from the lack of activity in 2020 and begins to re-purpose to meet consumer preference demands. Last year, we saw 160.1 million square feet of retail leasing activity, down 31% from 2019. Although the average sales density for stores in the U.S. declined by 12% from 2019, we anticipate densities to rise as there will be more in-store shopping compared to 2020, as well as the removal of weaker performing space which will push up the average.
Spending by where we shop will also be greatly affected in 2021 as urban and downtown areas remain muted due to a much lower number of tourists and commuters. Suburban and rural areas will hold up better as consumers continue to work from home and spending in these areas are more focused on food as well as home improvement products.
2021 Lease Rate Outlook
Negative net absorption, rising vacancy rates and softening landlord confidence collectively lead retail rent growth to decline by 0.5% at the end of 2020. Such an inflection marks the first time the U.S. has seen negative rent growth since 2011. Large, coastal markets such as Boston, New York, and Los Angeles saw the most negative rent growth, while Southeastern markets such as Nashville, Tampa, and Orlando were among the top markets maintaining positive traction.
Rents are expected to decline further over the coming quarters as space give-backs weigh on vacancy. We forecast retail rents to fall around 3% in 2021 and begin to return closer to pre-pandemic levels in 2022. Rent collections remain an important theme across the retail sector as total rent collections have increased by more than 50% since the beginning of the crisis, with 86% of total retail rent collected in the U.S. at the end of 2020. Compared to the year prior, 91% of total retail rent was received, thus bringing the retail market closer to pre-pandemic levels and demonstrating stabilization for retail tenants.
Shopping centers with nonessential retailers will continue to leave many landlords to focus on rent deferrals, abatements, and lease restructurings with newly added pandemic-specific language. Retailers restructuring and renegotiating their leases with landlords are abundant across the U.S. and span a wide variety of segments, including entertainment venues, apparel retailers, department stores, and restaurants. Freestanding retail centers, which often feature single tenants in the grocery, fast food, pharmacy, and banking segments, have arisen as standout outperformers throughout the pandemic, with comparatively stronger rent collections and are expected to flourish in 2021.
2021 Valuation Outlook
At the end of 2020, a 43% year-over-year drop in deal volume brought the U.S. total retail investment sales to $37.7 billion. Retail property prices declined for most of 2020 and annual growth in prices fell by 4.3%. Investment activity for shop space fell less in 2020 than it did for sales of shopping centers, with shops posting a 38% decline over the year and a 47% drop for centers. While deal volume fell in 2020 due to the pandemic’s impacts, the CPPI for grocery-anchored retail climbed 1.6% year-over-year.
Capital trends for the U.S. retail market present mixed signals as some locations and secondary types are outperforming while others suffer due to disruptions caused by the coronavirus pandemic. Cap rates across the board for all retail subtypes are expected to rise nominally in the first half of the year and stabilize in the second half of 2021. Asset values for malls and centers will be lowered to reflect the impact of COVID-19 on property pricing due to tenant fallout from restaurants, local businesses, fitness centers, theatres, and other highly leveraged retailers. Retail properties home to essential businesses such as grocers, pharmacies, dollar stores and QSRs will remain attractive, with cap rates holding steady heading into 2021.