What Strong Retail Demand Means For CRE Investors

The predominant investor thinking—that e-commerce drove the lion’s share of the gains—is flawed.

Retail demand remained strong in October despite fears of inflation and supply chain disruptions, with the latest retail figures suggesting “sustained positive economic momentum” for the sector.

That’s according to John Chang, Senior Vice President and Director of Research Services at Marcus & Millichap.

“No matter how you slice the data, retail sales are way up, the strongest on record,” Chang says.

Core retail sales (which exclude auto and gas) were up 14.9% from last year and 20.9% from pre-pandemic levels. Even accounting for inflation, core retail sales are still up 10.8% over last year and 15.7% from before the pandemic.

A big piece of the retail sales surge was online, Chang says, with internet sales up 10% over last year and an incredible 40% over pre-pandemic levels.  But he also says the predominant investor thinkingthat e-commerce drove the lion’s share of the gainsis flawed.  

Core brick and mortar retail sales on an inflation-adjusted basis are up “significantly,” clocking in 9.3% higher than a year ago and 13.8% higher than pre-COVID levels.

“Think about that for a minute,” Chang says. “In the second quarter of last year as we entered the pandemic and we shut down our economy, there was tremendous speculation that retail would be severely impacted, and it was. Numerous retailers were hard hit and several closed permanently because of the pandemic but now as we come out the other side, this sector has more tailwinds than headwinds. And in many sectors, there are fewer competitors.”

Store-based retail sales are up 13.8% over pre pandemic levels on an inflation-adjusted basis, and foot traffic to retail centers has fully returned, according to Placer.ai data.

As of Q3, the multi-tenant retail vacancy rate for the US was back down to 6.3% after peaking at 6.5% in Q1.  The average asking rents for the asset type was also up over 3% over pre-pandemic levels. 

Industrial will also continue to be impacted by strong retail sales, Chang says. As of Q3, industrial vacancy rates were at a record low of 4.4% nationally, and rents are up.

In conclusion, “yes, there was some trauma in the retail sector but it was not nearly as bad as anybody thought it would be,” Chang says. “And we’re seeing a retail bounce-back that should carry positive results into 2022.”