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Where Retail’s Headed in 2024
Unpack the misplaced apprehension around retail properties, and learn how they can be strong performers in your commercial real estate portfolio.
Retail’s gotten a pretty bad rap over the years. The pandemic definitely hasn’t helped things, either, and now many are completely missing one thing: Retail is having a resurgence in the commercial property investment world.
This resurgence is underpinned by solid performance metrics and an innovative response to the e-commerce boom, signaling a bright future for retail CRE as a robust component of investment portfolios.
While the outlook is my own, I’ve informed myself using a few great commercial real estate resources for this piece, including CBRE’s 2024 real estate market outlook and Colliers’s 2023 retail report.
Behind the Resurgence of Retail CRE
The narrative of retail's demise has been greatly exaggerated, as recent data paints a different picture — one of resilience and recovery. Industry reports from JPMorgan, CBRE, and others highlight a sector in the midst of a rebound, with neighborhood shopping centers in urban and suburban areas showing steady performance, steady or declining vacancy rates, and moderately positive rent growth. This positive trajectory is expected to continue through 2024, defying the skeptics with tangible proof of retail's enduring appeal and profitability.
But what about e-commerce, you ask. While e-commerce has certainly reshaped the retail landscape, it really only represents a fraction of total retail sales — around 15%. This leaves ample room for brick-and-mortar stores to thrive, particularly those that adapt and innovate.
The success of physical retail today is way more than just selling products but also in creating experiences that cannot be replicated online. From experiential retail concepts to the strategic integration of technology within stores, brick-and-mortar is reinventing itself to become more immersive and engaging than ever before. This evolution is compelling evidence that the physical retail space can coexist with and even complement the digital shopping realm, marking a significant chapter in the resurgence of retail commercial properties.
Economic and Consumer Trends Bolstering Retail CRE
The retail sector is witnessing a notable upswing, buoyed by strong economic indicators. Despite facing headwinds such as high interest rates and the resumption of student loan payments, the resilience of the retail market shines through.
The moderate but steady retail sales growth forecasted at around 2.6% for 2024 speaks volumes about the sector's robustness amidst challenges. This growth is a testament to the enduring strength of retail CRE as an attractive investment.
A significant shift back to physical stores marks a turning point in retail. Consumers, after experiencing the convenience of online shopping, are now seeking the tangible, sensory experiences that only brick-and-mortar locations can offer, as mentioned a bit earlier on. This return is driven by a desire for immediate gratification, personal service, and the enjoyment of shopping as an activity. Retailers are responding by creating engaging, immersive environments that draw customers in, making the physical store an irreplaceable part of the shopping ecosystem.
The line between online and offline shopping is becoming increasingly blurred, creating a synergistic relationship that enhances the consumer experience. Retailers are leveraging technology to integrate these two worlds, offering services like online order in-store pickup and virtual try-ons. This convergence not only meets the evolving expectations of consumers but also positions retail real estate as a dynamic, adaptable asset class. The ability of brick-and-mortar stores to complement and coexist with e-commerce platforms is a compelling indicator of the sector's potential for sustained growth and innovation.
Investment Opportunities in Retail CRE
The landscape of retail investment is evolving, with certain markets emerging as hotspots. Insights from industry reports point to markets like Orlando, Charlotte, Denver, San Francisco, and Orange County, CA, as regions with strong performance metrics and low availability rates. These areas have demonstrated resilience and growth potential, making them prime targets for retail CRE investment.
The retail sector presents a nuanced investment climate, balancing risks with potential rewards. High construction costs and economic uncertainties pose challenges, yet the sector's overall resilience and adaptability offer compelling opportunities. Investors are advised to conduct thorough market analyses, considering factors such as consumer spending trends, e-commerce impact, and geographic desirability to mitigate risks and maximize returns.
For 2024, strategic investment in retail hinges on recognizing trends and aligning with consumer preferences. Investors will likely be better served looking towards open-air suburban retail centers and markets showing strong demand for neighborhood and community shopping centers.
Focusing on properties that offer experiential retail opportunities or are positioned to benefit from the synergy between online and offline shopping experiences could provide competitive advantages. The aim is to invest in spaces that not only attract consumers but also enhance the overall shopping experience, driving foot traffic and tenant demand.
Challenges to Opportunities
Facing high vacancy rates, forward-thinking developers are transforming long-term empty retail spaces into vibrant, mixed-use developments. These repurposed spaces are finding new life as residential units, offices, and cultural venues, creating bustling community hubs that draw people back into local areas. This approach not only addresses the challenge of unused space but also revitalizes neighborhoods and supports local economies.
Incorporating technology and sustainability into retail spaces is proving to be a long-term value driver. Smart technology is enhancing the customer experience, while sustainable practices are meeting the growing demand for environmentally responsible businesses. Retailers and property owners investing in these areas are not only future proofing their assets but also appealing to a broader base of conscientious consumers.
Market Forecast and Strategic Insights for 2024
The retail sector is poised for growth in 2024, buoyed by a combination of strong market fundamentals, a decrease in vacancy rates, and a steady — even if not extremely steep — rise in rents, particularly in suburban open-air centers.
For investors and developers looking to capitalize on the anticipated growth, focusing on adaptive reuse projects, experiential retail formats, and properties with technology-driven solutions can offer substantial returns. Emphasizing locations with growing demand for retail space, such as certain high-population-growth urban and suburban areas, will be key. Additionally, sustainability and resilience should be integral to development strategies, appealing to the increasing consumer preference for green and socially responsible retail environments.
Success in 2024 will require agility and the ability to adapt to ongoing changes in consumer behavior, technology, and the economic environment. Investors and developers should remain vigilant, ready to pivot strategies in response to new trends and challenges. Embracing innovation, whether through digital integration, sustainable practices, or novel retail concepts, will be crucial in staying ahead in the dynamic retail CRE market.
One Last Way to Drive Profitability
You get the picture. Most retail — albeit not all of it — is well positioned for 2024. Simply put, many types of assets in many different metros are going to perform well.
Regardless of where (or what) your property is, though, don’t forget that something as basic as financing can make a world of difference in the profitability of your investment. Whether you’re looking to buy, refinance, build, expand, renovate, or anything else I’ve left out, finding the best terms isn’t just an ideal — it’s a necessity for getting the returns you’re after.
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