The latest forecast for the U.S. retail property market over the next few years is looking bullish, with the industry buoyed by a strong and fast-growing economy, pent-up consumer demand because of the pandemic, and the desire for shoppers to connect with a human.
A panel of executives from brokerage JLL presented their first webinar update on retail since the end of last year, when the world was in the grips of COVID-19, in lockdowns and with mandated business closings. Last year there were predictions of a brick-and-mortar “retail Armageddon” because of the pandemic, according to Naveen Jaggi, president of JLL America Retail Advisory Services. It hasn’t turned out that way, he said.
“If nothing else over the last seven months we’ve learned that retail is more resilient than I think anybody had expected back in the summer and fall of 2020,” Jaggi said. “There was a lot of talk about retail being hammered and in many ways we were going to see this as the beginning of a long downfall in retail. And that’s not happened actually. To the contrary, retail has done quite well, remarkably well. And we’ve seen that in many different sectors of retail whether it’s return to the mall, where foot traffic is getting back to business, the [food and beverage] business, and many others that are seeing great resilience.”
The assessment echoes the National Retail Federation’s full year forecast of a 10.5-13.5% increase in sales, the fastest growth in nearly 40 years. And U.S. stocks have been at record highs, an indicator of high expectations even as the coronavirus outbreak continues.
JLL’s executives laid out the economic factors and consumer behaviors they predict will boost retail for the next several years coming out of the pandemic, including employees returning to work in their urban offices and tourism picking up again. James Cook, JLL’s Americas Director of Retail Research, said he expects this year’s back-to-school shopping season to be the strongest one in years, in the wake of students being able to return to their classrooms.
In a survey, JLL found that 55% of consumers are eager to get out to shop at brick-and-mortar sites “to connect with a human, to talk to an employee, to get help from an employee, to ask questions,” said Emily Miller, senior vice president of strategy at Big Red Rooster, a JLL company.
The retail industry is not without its challenges though. There are major cities, for example, that have not fully lifted safety mandates and where consumers are still leery of being out and about. In New York, a problem with street violence has many businesses worried, and it appears that workers may be coming back to the office at a lower rate than predicted. And, of course, it's to the benefit of a group of retail real estate executives to give an upbeat forecast for the sector they depend on for their living.
Added Demand Expected
Even so, JLL chief economist Ryan Severino points to historically low interest rates, strong fiscal stimulus funds, the reopening of the supply side of the economy, and what he called “dry powder,” consumers being able to resume their normal lives and spend to enjoy their favorite activities, such as dining out or celebrating holidays with friends and family, for “super normal growth.”
Restaurants in New York neighborhoods such as SoHo and the West Village are actually seeing sales at about 120% to 150% of their pre-COVID revenue, according to Charlotte Elstob, JLL senior vice president of global business development.
That’s because they are not only operating at full capacity indoors, but they have additional seating outdoors where they started serving patrons when indoor dining was barred, Elstob said.
This year the U.S. gross domestic product will increase an estimated 6% to 7%, compared to a more typical 1.7% average annual growth, Severino forecast. He described it as “the strongest growth in a generation, which bodes well for retail.”
Advance retail sales have already hit a record this year, up nearly 16%, showing that consumers are eager to get out and spend money, according to Severino.
In his presentation, Cook cited statistics regarding the comeback of travel, and hotel, casino and restaurant visits. For example, hotel and casino visits are only down now about 8% from the comparable week in 2019, “close to recovery,” according to Cook.
Return to the Office
JLL surveyed Fortune 500 office users because office occupancy affects retail businesses in the areas surrounding those businesses. In February 2020, 90% of employees were in their office most days of the week, Cook said. By December, JLL expects 80% of the employees at those companies to be back in the office for three or more days a week, according to Cook.
The pandemic accelerated retail trends such as curbside pickup, advancing it about 10 years in 18 months, according to Miller. Brick-and-mortar retail locations “are all now an integral part of e-commerce,” Cook said, not just warehouses.
E-commerce’s impact on brick-and-mortar is less than some people may think, according to Cook. E-commerce had been averaging 11.5% of all retail sales and then shot up to almost 16% in one quarter last year. But now it has slid down to 13.8% of all retail, Cook said.
He expects retail rents to increase next year while vacancy rates, which have peaked, fall: “The overall outlook for retail real estate is quite good,” Cook said.
European retailers remain interested in the U.S. market, though coronavirus-related travel restrictions have made it hard to get some deals done, according to Elstob. But one Spanish retailer was able to nab a great location in SoHo, at a good rent, in an opportunity that turned up as a result of the pandemic, she said.
“I’m bullish on retail,” Jaggi said. “I’ve always been bullish on retail. I will continue to be bullish on retail because I’m bullish on the U.S. consumer and the U.S. retailer.”