Can Retail Survive Another Recession?

Muted. That’s how GlobeSt.com recently characterized consumer activity through the rest of the year. 

That’s understandable. All the talk of interest rate hikes and the threat of recession can not only shake the nerves of shoppers but investors as well. However, we’re looking at a bigger, longer-range picture.

First, we should note that brick-and-mortar retail is at last finding its place in the sun. For years, even prior to the pandemic-induced recession, we saw closings and bankruptcies as internet sales grew and certain long-familiar brands, unable to adjust to new modes of shopping, fell by the wayside. The problem only escalated during the depths of the pandemic, when quarantine protocols forced shoppers to turn to their keyboards.

But it is a new day for brick-and mortar. Contradicting the inflationary fears currently being fanned largely by news outlets, is a strong desire to congregate, to get out and about. The social nature within all of us draws us to the long-touted “retail experience,” and investors and developers are responding.

In fact, as one source reported recently, e-commerce sales actually dropped in Q1 by almost 300 basis points “as people head back to stores.” Even the poster child for struggling retail–the American mall–saw net absorption spike to 2.5 million square feet.

The capital markets have taken notice, and REITs and institutional investors both gained market share in the quarter–14% and 12% respectively. And where the capital flows, developers are not far behind.

This is not to say that retail is not without its challenges. Interest rates and recessionary fears do have everyone keeping an eye on the Fed, and there’s still much improvement the sector needs in terms of the supply chain and accommodating new, post-pandemic delivery methods.

For investors, this demands careful analysis, upfront homework, to separate the vibrant markets from the underperformers and the vibrant tenants from those that no longer address consumer need or cannot adapt.

But inflationary pressures, just like stock market upheavals, are cyclical, and by definition, relatively short-term. In times such as these, where faith in Wall Street has faltered and the once-growing excitement over such new vehicles as cryptocurrency has hit the skids, investors—high-net worth investors and smaller mom-and-pops alike, turn to the safety and security of hard assets. And while such economic upheavals can drive cap rates up, interested investors gathering around safe-haven assets can serve to counteract such trends.

The trends developed over the past few pandemic-driven years have set the brick-and-mortar retail industry on a long-term course of growth. And virtually all boats are rising, from the mega-mall down to the small, unanchored neighborhood strip center. 

New retail brands are coming online as never before, even as some older names, unable to keep up, fade away. Restaurants have embraced a hybrid model of eat-in and delivery, another lesson they learned from their fast-food, take-out counterparts over the past two-plus years.

And of course, the single-tenant retail model, delivering to investors the long-term security of the triple net lease, remains a sure bet.

In a very real sense, there is a tug of war waging between inflationary threats and the consumer’s need to congregate once again.

We’re betting on the long-term strength of that long-pent-up need to see the retail sector through this short-term period of uncertainty.

Jonathan Hipp is Principal, U.S. Capital Markets and Head of U.S. Net Lease Group for Avison Young.