R.O.I. Real State – Commercial Newsletter- August 2021
Posted on August 30, 2021
Even before the arrival of the pandemic, competition from Amazon and other online retailers was causing headaches for traditional brick-and-mortar locations. When lockdowns and other social restrictions made in-person shopping an even greater challenge, the situation looked dire.
With the worst of the pandemic behind us, however, retail is looking stronger as we head into the fall. Foot traffic is up at regional malls and multitenant strip malls, and neighborhood retail has successfully shifted from products to services. According to CoStar, mall vacancy rates fell 150 basis points last year, and it is expected that they will decline an additional 170 basis points in 2021. AZ Big Media recently reported that investment sales are up in Greater Phoenix retail real estate, and the market posted positive net absorption in the first half of the year—more than twice what was absorbed in all of 2020. In particular, two trends have been key in fostering recovery:
Trend #1: Service-Based Retail, and Drive-thru, Takeout and Cloud Kitchens
Advances in technology and changes in consumer habits (particularly the desire to eat at home) are the story here. A number of chains are placing their bets on for the long term by investing heavily into the drive-thru/pick-up window channels. During the pandemic, drive-thrus had a 25% to 35% increase in sales and continue to have momentum. Similarly, digital orders at fast-food restaurants have increased by 23% since first implemented, a number which is anticipated to triple in 2021. Cloud/ghost kitchens provide lower risk and higher return, particularly in high-rent areas.
Trend #2: Adaptive Re-Use and Mixed-Use
Next, adaptive re-use and mixed-use trends in Phoenix and across the nation, particularly within hospitality and retail, have continued to unfold. Mixing office and multifamily use creates a virtuous circle: helping mall owners create foot traffic through the addition of office workers and residents, who in turn benefit from easy access to mall amenities such as dining and shopping. Last-mile delivery and distribution centers are often another feasible option for malls with empty space.
Brick-and-mortar continues to be a tough arena, and real estate research firms are predicting that more than half of all major U.S. department stores in malls will have permanently shuttered by the end of 2021. Notwithstanding, consumers still want to touch and feel their goods, and many digital-native retailers (such as Warby Parker, Untuckit, Allbirds, Away and Third Love), are opening up/operating brick-and-mortar stores for this very reason. While department stores may be a thing of the past—or may need to right-size/boutique their operations—there is life in retail, and consumers have dollars to spend. In addition to the trends above, limited construction and Phoenix’s growing population should help coax this market into balance as it continues to evolve