It’s no secret that retailers have taken their hits during the last two years of the COVID-19 pandemic. But in cheerier news? There are signs of hope in this sector today.
Earlier this month, CoStar Group released its annual Global Predictions Webinar, predicting that some U.S. retail markets that were hit particularly hard by the pandemic will experience significant recoveries in 2022.
CoStar said that markets such as San Francisco, Boston, Washington D.C. and New York City should at least begin to recover throughout the rest of this year. CoStar also pointed to at least one Midwest market — Nashville — as being particularly well-positioned for a strong rebound in retail foot traffic and rent growth.
And other Midwest markets? CoStar’s analysis said that two major cities here, Chicago and Minneapolis, are expected to see either slower-than-average or average growth in retail rents throughout 2022 and slightly above-normal growth in leasing activity during the year. Not great news, then, but also not terrible for both major Midwest markets.
Kevin Cody, senior consultant with CoStar Advisory Services, said that the Global Predictions Webinar contained plenty of good news for the still-hurting retail sector.
“We expect to see leasing activity increase in 2022 in this sector,” Cody said. “In-store retail sales are also rising. We are seeing several markets that are still performing well on rent growth and occupancy, despite how hard retail was hit by the pandemic.”
Cody said that these positive signs aren’t surprising. Yes, in-store retail sales plummeted during the earliest days of the pandemic, back when many cities enacted stay-at-home orders. But retail sales rebounded quickly as the pandemic progressed, Cody said.
Sales have continued to improve throughout most of 2021 and the earliest months of this year. Cody said that CoStar analysts expected retail foot traffic to continue improving, too. The rise of the Omicron variant, though, has slowed this metric for 2022 so far, he said. It remains to be seen if retail foot traffic will rebound now that COVID-19 cases are again falling throughout much of the country.
Not all parts of the country are equal when it comes to retail performance. Cody said that markets in the south, including several cities in Florida, Arizona and Texas, have all seen stronger retail performances. Many cities on the West Coast, though, have seen retail sales, foot traffic and rents all remain sluggish throughout the pandemic.
In the Midwest, retail activity is a bit on the sluggish side, too, Cody said. This isn’t all pandemic related. Demographics and population loss in some Midwest cities are also hurting retail markets in the center of the country.
Not all retail types are equal, either. Cody said that indoor shopping malls have been the hardest hit during the pandemic.
“That is largely due to enclosed malls being harder to shop at when restrictions and social distancing are in place,” Cody said. “But also, the tenant rosters at malls are typically more exposed to competition from ecommerce. Malls were facing challenges even before the pandemic.”
Strip centers, though, have fared better during the pandemic. Part of that is because consumers can spend more time outside, still considered safer by many consumers, when shopping at individual strip centers. Many of these retail centers also are home to retailers who are not competing as directly with ecommerce. Beauty salons, for instance, offer a service that consumers can’t get online.
“One of the biggest headwinds that retail has faced is the growth of ecommerce,” Cody said. “There has been a shift in consumer spending preferences that will remain for quite some time. The threat of ecommerce has been here long before the pandemic and will continue after it.”
Of course, online shopping only grew in popularity during the pandemic. Many consumers who were reluctant to buy clothing, food, electronics, toys and sporting goods online turned to the Internet at the beginning of the pandemic.
Fueled largely by the ease of online shopping, certain retailers not only survived but thrived during COVID-19. Cody pointed to those selling sporting goods, books, music and home-improvement supplies as doing especially well. Warehouse clubs and super stores, the Walmarts, Costcos and Targets of the world, also performed well during the pandemic, he said.
These shoppers have now seen how convenient online buying is. It’s likely, then, that these consumers will continue doing at least some of their shopping online even after the pandemic fades away.
Savvy retailers are relying both on their physical locations and their online presence to boost sales. Cody used department store chain Macy’s as an example.
Macy’s recently released studies showing that its ecommerce sales fell in the surrounding area whenever the chain closed a physical store. That report, Cody said, shows how important physical space remains to a retailer.
The most successful retailers today take advantage of physical and online space, Cody said. A customer might walk into a nearby Macy’s – or might even simply drive by one – and then make purchases online from that retailer’s website when returning home. The physical space acts as an enticement or reminder for customers, inspiring them to later log onto the retailer’s online home to buy what they need.
“Some retailers are right-sizing their physical footprints and focusing on their more profitable locations,” Cody said. “But they are also realizing that they need the physical presence to drive ecommerce sales.”
Before the pandemic, retailers that were selling experiences, such as high-end bowling alleys and movie theaters that delivered food to patrons’ seats, were performing well. That came to a halt during the earlier days of the pandemic when many consumers sought to avoid crowds in indoor settings.
But what about today? Is experiential retail in recovery mode?
Cody said that CoStar is predicting a continued rebound in this type of retail in 2022.
“There is some revenge shopping going on here. People have a desire to return to those experiences that they enjoyed before the pandemic,” Cody said. “Those retailers that can provide experiences that consumers can’t get online will see their business return as cases fall and people feel more comfortable.”
There’s also the suburban vs. urban divide in retail today. Before the pandemic hit, retail activity in urban centers was on the rise. Again, COVID-19 changed that, as workers moved to work-from-home mode. This left quiet office buildings in most downtowns, something that negatively hit the retailers in the urban centers of major cities.
At the same time, retail activity in the suburbs rose during the pandemic. With more people at home during the day, retailers in the suburbs saw their sales and foot traffic increase.
“There has definitely been a shift in spending from urban to suburban,” Cody said. “We have seen a recovery in urban retail to an extent. But it is still underperforming when compared to suburban retail. We do expect rent growth and traffic to come back to urban retail, but we also expect it to continue to underperform when compared to suburban retail for a while.”
The key will be the return of office workers and tourism, two factors that urban retail largely relies on. Cody said that tourism is steadily gaining strength. Office workers, though, still aren’t returning in big numbers to downtowns.
“Right now, office is the biggest key to urban retail performance,” Cody said. “But it’s uncertain what will happen. Even after cases fall, there will be some sustained increase in remote working. People want to work remotely now.”