Retail is making a comeback: Here’s what experts say
Even before the COVID-19 public health crisis, brick and mortar retailers were facing headwinds thanks to the convenience of online shopping, with Amazon being emblematic of the supposed death knell of retail. Is the demise of in-store shopping playing out as predicted, or have reports of its death been greatly exaggerated?
“Let’s be honest — for the average institutional investor, retail has been out of favor for the past few years,” says Onay Payne, managing director of real estate at Lafayette Square, during the Urban Land Institute’s (ULI) Trends Day event on March 9, 2022. “But we may now be poised to see a change in investor perceptions in the sector.”
One reason for the shifting views on the sector is how quickly consumers returned to shopping. It took 41 months for spending levels to recover after the Great Recession, compared to five months during the COVID-19 public health crisis. “After a steep drop in retail spending at the beginning of the pandemic, we saw a strong V-shaped recovery — spending is more than 20% above pre-pandemic levels [as of March 2022],” Payne continues. “The length of the recovery period was incredibly short.”
A combination of factors, such as the availability of vaccines, generous government stimulus and pandemic restlessness, meant consumers had money in their pockets and were ready to spend it. This resurgence of shopping is borne out in the data. Colliers’ year-end 2021 market report on Metro Phoenix reveals a handful of indicators to a healthy rebound in the retail sector, including that the vacancy rate has dropped to 6.8% — a seven year low.
New companies breaking into Metro Phoenix and expansions from existing tenants is compressing the vacancy rate, according to Phil Hernandez, senior research manager at Colliers, but he doesn’t see this as a concern.
“We’re developing at a healthy level right now. There was a big pause on development during the pandemic because of the uncertainty, but it picked back up quickly. It didn’t lag the way office development is lagging,” he says.
Carol Schillne, senior vice president at ORION Investment Real Estate with the Schillne Retail Team, believes that these factors helped investors regain confidence in the sector. “Investors are taking another look at retail. I’d say the single tenant net lease investment market for retail is still very strong,” Schillne notes. “Improving retail fundamentals and shifting consumer behaviors is going to favor brick-and-mortar stores. It’s motivating owners to expand their retail portfolio, and it’s worth noting too that the areas with strong in-migration, like we have here in Arizona, and markets that are primed for strong tourism revivals, will be a target area for investors in the retail space.”
With solid underpinnings, the retail market looks to be on the rise in Greater Phoenix. Throughout the metropolitan area, new retail centers are being brought to market. Verrado Marketplace is bringing 500,000 square feet of commercial space to Buckeye and the Village at Prasada will add more than 700,000 square feet of shops and an entertainment district to Surprise.
“We had [approximately] half a million square feet under construction at the end of last year,” Hernandez says. “We essentially did double that for the first quarter of 2022. The growth of the West Valley is getting strong attraction on the retail side.”
At the beginning of the pandemic, the prevailing wisdom was that big box stores were going the way of the dinosaur. “No one is going to come back — what are we going to do with all this space?” Hernandez recalls asking himself. “But from what I’ve heard, lots of people got their online shopping fix and want to go back into physical stores. Prasada is already 100% leased, which is astonishing. “
Schillne adds that the retail market is maturing in the Valley, thanks in part to good planning. Between smart infrastructure investments, a strong university system, a diversifying economy and being a magnet for new residents — Schillne herself moved from California a decade ago — gives Arizona a strong foundation to stand upon.
The current state of the economy, however, isn’t all sunshine and rainbows. “One of the biggest concerns for retailers is inflation. Consumers may start to curtail their non-essential purchases, as they focus on the cost of necessities such as gas and housing. ,” she says. “Most retailers are trying to be cautious.”
That said, Schillne believes that the state as a whole is in a much better position than it was before the Great Recession. “We’re blessed to be in Arizona,” she concludes. “We have incredibly strong fundamentals for our economy, it’s no longer just aligned with housing growth. There are a lot more facets to our economy that make it more resilient than ever.”