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Perch Weath Insights Blog

The Retail Market Paper

Retail real estate is one of the largest and most diverse product types within commercial real estate. It contains about 25% of the market share as shown by Forbes. Within it, the retail market includes clothing stores, pharmacies, supermarkets, restaurants, and others. Retail establishments are used specifically to market and sell consumer goods and services.

How Covid-19 has Impacted Retail

The effects of COVID-19 led to the highest number of retail bankruptcies in over a decade. Some branches of the retail sector have been hit harder than others. Strip malls and shopping plazas are two that have been affected most by the pandemic. These places were already affected by the growing popularity of online shopping. Once the pandemic hit, it was the end of the line for many of these malls and plazas. According to Forbes, vacancy rates for malls rose to 10.1% in the third quarter of 2020, the highest vacancy rate in 20 years.

Many retail spaces that were unable to outlast the pandemic will be repurposed. The rising need for medical office facilities will become an option for some. Others may be utilized in the education sector, become distribution centers, etc. Although some analysts predict 20% less offline retail by 2025, there are many parts of the sector that could continue to prosper.

Retail facilities like Target, Home Depot, and Walmart came out of 2020 rather untouched. According to Mordor Intelligence, Walmart announced this year that it plans to spend over $500 million upgrading some of its stores. Their broad mix of products keeps demand high from buyers.

Restaurants that were able to outlast the pre-vaccine pandemic are already coming back.

An article by Marcus & Millichap explains that in April of 2015, "spending at restaurants and bars surpassed grocery sales for the first time on record." Due to stimulus money, demand, and reopening, dining out has re-eclipsed grocery sales. Delivery services such as Door Dash and Postmates have contributed to this as well.

Modern Way of Shopping

E-commerce shopping (online shopping) had become a popular means of buying goods, even before COVID-19. E-commerce is driven by consumers' buying behavior, leading suppliers to create online platforms for consumers. The use of smart phones and mobile devices make it easy for buyers to purchase their goods over the internet.

Although online shopping has become increasingly popular, a retail article written by Deloitte explains, "(m)any shoppers want to mix and match their channel journey based on convenience needs." Successful retailers will operate an omnichannel model with both offline and online channels. In the second quarter of 2020, during the height of the COVID-19 pandemic, e-commerce sales accounted for just 16.1% of total sales in the US market, as shown by a Mordor Intelligence report .

Obviously, many buyers still prefer to shop in-person. As stores have opened and individuals continue getting the vaccine, we may continue to see a brighter future for many within the retail sector.

Looking to the Future

The multi-tenant and single-tenant valuations of retail properties have held stronger than some had previously predicted. According to Marcus & Millichap, "owners are now receiving more than 91 percent of rents, surpassing 90 percent for the first time since March 2020." Deal volume surpassed $18 billion in the fourth quarter of 2020. Before the year was halfway through in 2021, sales were already approaching $30 billion.

Core retail sales have grown by 16.8% since February of 2020. Initially, this spike can be attributed to government stimulus checks and unemployment benefits. For those who remained employed, a reduction in commuting and entertainment options lined their pockets. This allowed for increased spending in retail sectors.

As professional sports arenas, concert venues, movie theaters, and other entertainment sites continue to increase occupancy, retail sales should normalize. A Marcus & Millichap article explains that Americans have compiled $4 trillion in accessible capital compared to pre-pandemic levels. The article goes on to explain that consumer confidence reached a 16-month high in June. This is the result of less COVID-19 deaths due to vaccine distribution.

Surveys have shown strong employment growth in recent months. Unemployment benefits are expected to end in September and the public is incentivized to go back to work. According to a survey conducted by the U.S. Bureau of Labor Statistics in May, 9.3 million workers were searching for positions. At the same time, there were 9.2 million spots for job openings. Strong employment growth during the month of June indicates the job market is gaining traction.

Advantages to Retail Investments

Retail investments can offer unique advantages that other product types may not. They have the potential to produce monthly dividends, which can be very attractive to investors who are seeking an income-stream-based investment rather than capital gains growth. Retail investments also provide turnover rents. This affords investors a percentage of the gross revenue from the business they lease. Another potential advantage to a retail lease is that the lease period is typically 5 years at a minimum. This allows tenants time to build their business and generate income.

Final Note

A sound retail investment may be profitable to the buyer in the current market. It is important to talk with educated advisors who can help determine which investments may have the potential prosper in coming years.

Interested in learning more about options for your real estate investment? Contact us today at Perch Wealth.

References:

Deloitte, 2021 Retail Industry Outlook, The New Rules of Retail (2021) https://www2.deloitte.com/us/en/pages/consumer-business/articles/retail-distribution-industry-outlook.html

Marcus & Millichap, Retail Midyear Outlook, Special Report (Midyear 2021) https://www.marcusmillichap.com/research/special-report/2021/07/retail-midyear-outlook

Jeffrey Bartel, The Future Of Retail Real Estate: What To Expect, Forbes (March 22, 2021) https://www.forbes.com/sites/forbesfinancecouncil/2021/03/22/the-future-of-retail-real-estate-what-to-expect/?sh=4245e7562cbf

Mordor Intelligence, Retail Industry - Growth, Trends, Covid-19 Impact, and Forecasts (2021) https://www.mordorintelligence.com/industry-reports/retail-industry

U.S. Bureau of Labor Statistics https://www.bls.gov/

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

  • * There is no guarantee that any strategy will be successful or achieve investment objectives;
  • * Potential for property value loss - All real estate investments have the potential to lose value during the life of the investments;
  • * Change of tax status - The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • * Potential for foreclosure - All financed real estate investments have potential for foreclosure;
  • * Illiquidity - Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
  • * Reduction or Elimination of Monthly Cash Flow Distributions - Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • * Impact of fees/expenses - Costs associated with the transaction may impact investors' returns and may outweigh the tax benefits

author : Ben Carmona

Ben Carmona is a Managing Partner at Perch Wealth. With over 20 years of applied experience, Ben is an expert in real estate investments, structures, and strategies.

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