One of the biggest and most varied product categories in commercial real estate is retail real estate. According to Forbes, it holds roughly 25% of the market share. The retail market in it consists of establishments like clothes stores, pharmacies, supermarkets, and eateries, among others. Retail businesses are utilized only for the marketing and sales of consumer goods and services.
What Covid-19 Means for Retail
The number of retail bankruptcies increased to its greatest level in more than ten years as a result of COVID-19. The retail industry has been struck more severely in some segments than others. The two types of buildings most impacted by the pandemic are strip malls and shopping centers. The increased popularity of internet shopping had already an impact on these areas. For many of these malls and plazas, the pandemic signaled the end of the road. Forbes reports that the third quarter of 2020 saw a 10.1% increase in mall vacancy rates, the greatest level in 20 years.
Many retail locations that couldn't survive the epidemic will be put to new uses. For some, the growing need for medical office space will present an option. Others might be used in the educational sector or transformed into hubs for distribution, etc. Even if some researchers forecast a 20% decline in offline retail by 2025, there are still numerous areas of the market that are currently poised to experience massive growth.
Retail establishments like Target, Home Depot, and Walmart largely escaped 2020 unharmed. Walmart revealed this year that it planned to spend over $500 million modernizing some of its locations, according to Mordor Intelligence. Their wide range of goods keeps consumer demand strong.
Restaurants that survived the pandemic before vaccination are already reopening.
According to a Marcus & Millichap article, supermarket sales were surpassed by restaurant and bar expenditure for the first time ever in April of 2015. Dining out sales have once again outpaced supermarket sales as a result of stimulus funding, demand, and reopening. Additionally, delivery firms like Door Dash and Postmates have influenced this.
Modern Shopping Methods
Even before COVID-19, e-commerce (online shopping) had established itself as a common method of purchasing items. E-commerce is fueled by consumer purchasing patterns, which pushes vendors to build online marketplaces for customers. The adoption of smart phones and other mobile devices makes it simple for customers to make online purchases of their items.
Despite the rise in popularity of online shopping, a Deloitte retail article notes that "(m)any buyers desire to mix and match their channel journey based on convenience demands." Retailers who are successful will use an omnichannel strategy that combines offline and internet channels. E-commerce sales only made up 16.1% of all US market sales in the second quarter of 2020, during the height of the COVID-19 epidemic, according to a Mordor Intelligence analysis.
Of course, a lot of consumers still favor brick and mortar stores. A better future for many in the retail industry may be on the horizon as more stores open and more people receive the vaccine.
Considering the Future
Retail property valuations for both single-tenant and multi-tenant situations have held up better than expected. Owners are now getting more than 91 percent of rent, surpassing 90 percent for the first time since March 2020, according to Marcus & Millichap. In the fourth quarter of 2020, deal volume reached $18 billion. In 2021, revenues were already close to $30 billion before the year's midway point.
Since February 2020, core retail sales have climbed by 16.8%. This increase can initially be attributed to government stimulus payments and unemployment insurance benefits. The decline in transportation and entertainment options was money in the bank for those who kept their jobs. This made it possible for retail sectors to see greater spending.
Retail sales should return to normal as professional sports stadiums, concert halls, movie theaters, and other entertainment locations continue to fill up. According to a Marcus & Millichap study, Americans now have $4 trillion more in readily available capital than they did before the pandemic. The story continues by stating that in June, consumer confidence rose to a 16-month high. Less COVID-19 deaths as a result of vaccination distribution are the cause of this.
Recent surveys have revealed a significant increase in employment. The general people is encouraged to find new employment because unemployment benefits are set to expire in September. The U.S. Bureau of Labor Statistics found that 9.3 million people were looking for work in a poll it conducted in May. There were 9.2 million available positions at the same time. Strong employment growth in June is a sign that the labor economy is picking up steam.
Benefits of Small Business Investments
Retail investments may provide special benefits that other product categories might not. They have the potential to generate monthly dividends, which can be quite alluring to investors who prefer an income-stream investment over one that will increase in value through capital gains. Turnover rents are another benefit of retail investments. As a result, investors are given a share of the gross revenue generated by the company they lease. The fact that a retail lease normally has a minimum term of 5 years adds another possible benefit to the arrangement. Tenants can use this time to develop their businesses and make money.
In the current market, a wise retail investment might be advantageous for the buyer. It is crucial to consult knowledgeable experts who can assist you choose the investments that may perform well in the upcoming years.
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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