Consumers Rediscover The Joy Of Brick-and-Mortar Shopping

Once again, brick-and-mortar retail has risen from the ashes. Many predicted that it wouldn’t happen. They thought the pandemic had upended in-person shopping and consumers would permanently favor buying goods online. In the early days following the pandemic, that theory has proven false. Instead, consumers have returned to physical stores with a fury—and demand is so strong, retailers are struggling to keep up.

Last year, retail sales totaled a staggering $5 trillion, growing more than 17% from 2020, according to data from the U.S. Department of Commerce, and e-commerce sales made up 13.2% of the total. Online shopping decreased nominally year-over-year, illustrating that shoppers returned to physical stores as the outbreak of the COVID-19 virus subsided. While e-commerce accounted for a significant chunk of total retail spending, shoppers still spent an overwhelming majority of retail dollars offline.

The momentum has kept pace this year. “People seem more willing to go to a shop and spend, to throw parties and buy goods, and continue to spend increased time at our shopping venues,” says Sandy Sigal, president and CEO of NewMark Merrill Companies, a retail investor and developer.

Although some of this spending is due to higher pricing rather than increased shopping—as Jimmy Slusher, VP of CBRE’s National Retail Partners-West, notes, “A portion of increased spending can be attributed to higher-priced goods as a result of supply chain issues, which is contributing to overall inflation”—there has also been an increase in foot traffic. Ryan Ash, project director at Vestar, an owner of outdoor shopping centers across the US, has seen it firsthand throughout the company’s portfolio. “Consumers have seemed to return to their pre-pandemic shopping, dining and entertainment habits. Across our portfolio foot traffic has begun to exceed 2019 levels and our tenants’ sales are at an all-time high,” he says.

While consumers have returned to stores, the shopping experience has had to evolve once again to accommodate new consumer preferences and compete with robust ecommerce shopping platforms.

WHAT CONSUMERS WANT

Consumer spending has returned to pre-pandemic levels, but consumer-shopping habits will remain forever changed by the pandemic. In a recent McKinsey on Consumer and Retail podcast episode “Forecasting the Future of Stores,” McKinsey retail experts Tiffany Burns and Tyler Harris said consumers today are valuing speed and convenience over human interaction.

Sigal has also seen consumers show a preference for select retail locations. “I think the customer is limiting their stops to less destinations but spending more time at the ones that fill their needs,” he says. “This favors those spots that offer something special and combine a good shopping experience with multiple reasons to visit.”

Consumers also prefer outdoor shopping malls, a trend that was emerging before the pandemic and accelerated during the last two years when being outdoors was considered safe to avoid contracting COVID-19. “Prior to the pandemic the industry was seeing a trend of both consumers and tenants preferring outdoor retail centers compared to the historical enclosed malls,” explains Ash. “The pandemic really accelerated this transition and we expect it to continue over the next few years.”

Overall, consumers have returned to in-person shopping across the spectrum of retail segments, with almost every retail category experiencing increased spending when compared to the pit of the pandemic. “Consumer demand is strong and diverse,” says Ash. “We have seen tenant sales continue to grow across the retail spectrum including fashion, home goods, health and beauty and dining. We expect 2022 to be a record year for many of our tenants.”

In the years before the pandemic, retail investors were focused on internet-resistant retailers, like restaurants, grocery stores, gyms and other services that you could not get online. However, the pandemic has jumbled consumer demand. “Gyms and movie theaters are still not where they used to be,” says Sigal. “Gyms were making good progress and then omicron came along, and mask mandates really hurt them. As those mandates have been lifted, traffic is coming back; it is probably back to 65% to 75% right now.”

Movie theaters are also struggling, but a return to movie theaters will require strong releases with no at-home streaming option. “Movie theaters are dependent on timing,” says Sigal, meaning they need both a strong product to drop and for the health crisis to remain at bay. However, when there is an opportunity, people have returned to movie theaters, and the recent “The Batman” release was evidence of that. “It did really well in theaters, so it is apparent people want to come back, it is just going to take some time,” adds Sigal.

Now for the good news: the demand for these retail segments hasn’t exited the market; it has simply been funneled into other retail categories. Sporting goods and hobby purchases were at the top of the list, with sales up 40% over the last 24 months and 20% in the last year, according to Slusher. He also notes that spending at clothing retailers and department stores is trending above the historical average, saying it is “a positive sign for soft goods retailers.”

Restaurants may just be the star of the post-pandemic recovery, however. “As we’ve all witnessed while trying to reserve a table at our favorite restaurant, food service and food and beverage remain well ahead of its historical growth average, going 35% year-over-year from the fourth quarter 2020 to the end of 2021,” says Slusher.

Consumers are also looking to escape their homes—a place where they have been confined for the last two years—and shopping centers are serving as the primary destination. “Because so many people continue to work from home, the need to gather somewhere where they can hang out and the idea of a ‘third place’ to gather is stronger,” adds Sigal. Shopping centers had been moonlighting as community living rooms in urban centers before the pandemic, but the last two years has created more demand for gathering spaces outside of the home.

RETAILERS EVOLVE, AGAIN

These new consumer shopping habits have required a rapid response from retailers—but the industry is no stranger to swift evolution. Before the pandemic, retailers were quickly learning to evolve in the wake of ecommerce. It was a sink-or-swim time, and in many ways, it prepared retailers for the pandemic and the overnight changes that came with it.

Overall, retailers have shown they can be nimble and flexible in response to new consumer needs. “Retailers have proven resilient the last two years by adapting to consumer needs, beefing up omni-channel logistics and simplifying the consumer experience,” says Slusher. “Most notably, more stores opened versus closed in 2021, reversing a trend that predated the pandemic.”

Omnichannel has been a cornerstone of a successful retail model, and it has helped drive retail spending. Research from McKinsey shows that omnichannel customers shop 1.7 times more than single-channel shoppers. “It’s not a secret that online sales increase within a 10-mile radius of a retailer’s brick-and-mortar location; increased comfortability for returns and exchanges provides consumers added confidence for online purchases,” adds Slusher.

Still, retailers have faced new challenges, and the disruption to the global supply chain is among the most difficult to manage, especially for those with an omnichannel platform. “Retailers are struggling to keep up with demand,” says Sigal. “It is a tale of the have and have-nots. The labor shortage is an issue, and fulfilling demand for the places many people want to go can be difficult. Strong retailers have been able to keep their customers engaged through a blend of delivery, order online and pick-up in store, and regular store shopping.”

While Ash agrees that the supply chain has caused challenges and delays for retailers, he has also seen retailers find quick solutions to keep consumers satisfied. “The supply chain challenges across the globe have really slowed the recovery and created headwinds for many of our retailers,” he says. “The good news is that many retailers did an excellent job of adapting quickly and modified their supply chains. We are now seeing our retailers be able to meet the robust demand for their goods.”

The strength of retailer responses is well illustrated by leasing activity. According to research from CBRE, the retail sector marked its fifth quarter of positive absorption at the end of 2021, and the new supply of retail gross leasable area fell by 59%. Some of this activity is coming from ecommerce retailers adopting an omnichannel presence. “Many online retailers continue to expand physical store openings, driving new demand for physical retail,” says Slusher. “As a result, asking rents are now above pre-pandemic levels nationally.”

A lot of retail owners are experiencing the benefits first     hand. “Across our portfolio leasing activity and occupancy has been at an all-time high,” says Ash. ”Legacy retailers and new entrants into the market have begun aggressive expansion plans. Right now the industry is experiencing a lack of supply due to the lack of ground up retail development over the past decade. We expect competition for existing vacant spaces to intensify as existing centers reach full occupancy.”

Sigal has seen a similar fervor for retail space, which began last year. “We had the best leasing year ever last year and looks like more of the same this year.  Our retailers continue to expand and there is a lot of optimism,” he explains. “It is good to see.”

The drivers behind both retailer leasing activity and increased consumer spending are related. “Although overall e-commerce is still above pre-pandemic levels, retailers with physical stores continue to benefit from the consumer return to brick-and-mortar and the continued preference for retailers with omnichannel infrastructure to support purchaser needs will drive sales both online and in-store,” explains Slusher. “We expect the trend to continue amongst tenants, and for consumers to continue enjoying the social opportunities allowed by the placemaking of retail shopping, lifestyle and community centers.”

INVESTMENT CAPITAL IS BULLISH

Sigal was not shy to say that the current market fundamentals have made the firm bullish on retail investment this year. “The quick rebound really gave credence to our company’s mission statement of creating unique destinations with a sense of place,” he says. “People will continue to enjoy spending time and shopping at best-in-class locations and we hope to develop more of these assets for our growing communities in the southwest.”

But, Sigal isn’t alone. Retail investors are expected to post record-breaking sales volume this year. “On the real estate investment side of the market, we also expect to see some record sales of best-in-class assets that have performed strongly over the past two years,” says Ash. Slusher also expects retail investment volume to be strong in 2022. “The combination of retailer fortitude during the pandemic and renewed tenant demand for expansion is driving investors’ confidence in retail,” he says.

It isn’t surprising that investors are seeing the upside in retail. In addition to strong consumer spending, brick-and-mortar retail is also more affordable for everyone. “The cost of warehousing and transportation for pure-play online retailers is nearly double that of predominantly brick-and-mortar retailers,” says Slusher. “Returns and the required reverse logistics erode profit margins. Online consumer spending at pure-play e-commerce retailers has stabilized from its pandemic accelerated growth.”

Slusher has seen deals reflective of those trends first     hand from both private and institutional buyers. His group, National Retail Partners—West, marketed Nut Tree Plaza, a pure power center in Vacaville, California. “The project received tremendous interest from many different investors, ultimate pricing to levels more aggressive than would have been expected pre-pandemic,” says Slusher. “Attributed to the success of its discount retailers such as Nordstrom Rack, TJ Maxx and recent leasing momentum with the addition of expanding quick casual concepts such as Nick the Greek and others.”

This is a particularly interesting deal because it involves a power center, a property type that has increased in popularity recently. “Power centers have returned to favor as it has become apparent that mid-size box locations continue to serve as the last-mile distribution outlets in addition to traditional points of sale,” says Slusher.

Owners like Sigal are using this time to define strategy for the new retail age. “We need to own shopping centers that are integrated with the community, that are gathering places, and have the scale to create a superior consumer experience,” he says. “We still are buying and building but we want to be the center of the community and have the best retailers.  We don’t want to be the third property in a market.”

Overall, the perception of retail as a high-risk or even uncertain asset class is waning. Consumers are spending, retailers are signing leases and investors are pursuing deals. “Investor appetite turned back on in late spring 2021 and will remain strong as private and institutional capital continues to chase yield in retail versus alternative commercial investments,” says Slusher.

Sigal, however, has some concerns. Inflation—and particularly the high cost of gas—could temper retail activity. Even with those challenges, he says this will still be “a very strong year and as long as nothing else flares up.” But, with the pandemic drifting into the rearview mirror and consumers ready to make up for lost time, Sigal expects 2022 will be a “full year to gain and hold momentum.”