Consumer spending in the US went up by a slight 0.6% from July to August, reaching $537.5 billion, according to the Census Bureau. Total sales from June to August this year was—rather amazingly—up by 2.4% when compared to last year. So far, Americans’ retail spending habits have remained stable despite the pandemic, thanks mostly to online activity.
Industry experts attribute the trend to government cash and handouts during the thick of the lockdowns. However, they also expect consumers to reduce their spending when the $600 supplemental unemployment benefits stop coming in. It’s too early at this point to determine how much of the retail activity is caused by government aid and how much is due to hardcore demand buoyed by recent job gains.
Interestingly, non-store retailers saw a 22.4% uptick compared to the same period in 2019. However, brick-and-mortar clothing stores posted a 20.4% decline. These numbers underscore the fact that retail transactions—at least right now—are made mainly online.
The Effect on Commercial Real Estate
From a commercial property perspective, investor confidence in retail has understandably been shaky. E-commerce trends are expected to continue to expand and accelerate as brick-and-mortar shops continue struggling despite lockdowns easing down and the economy slowly reopening. People are afraid to go out—and it may stay like this for a while.
Seasoned CRE analysts say that there has been a noticeable decline in retail property valuations. And while these declines are not significant, they appear to be continuations of trends that have been over the past two or three years.
Ups and downs in office and retail sectors will likely be the new normal until there’s some certainty about public health crises. E-commerce will continue to thrive in the foreseeable future—no surprise there—as more people get comfortable with online retail experiences.
Retailers may also start using virtual events, online meetings, and webinars to reach out to customers and get them to buy. The most successful e-commerce players—mainly online groceries and supermarkets—are putting in more focus, effort, and investment in bettering the online shopping experience. More consumers will likely get comfortable buying what they need on the internet, and adoption will ultimately increase.
The growth of online grocery sales seems to be unstoppable. The number of people buying groceries online rapidly accelerated because of the pandemic, with 43% of surveyed consumers ordering staples and other items online in the last six months. That’s almost double the 24% figure from two years ago. It’s not surprising that experts now predict a 60% growth rate from pre-pandemic levels, with the sector reaching $250 billion by 2025. If this number is accurate, online grocery sales will account for 21.5% of the industry total.
Will Physical Retail Cease to Exist?
The future of brick-and-mortar stores may seem bleak, but there’s still hope. Analysts don’t expect this sector to disappear completely. But to survive, landlords, retailers, and investors will have to find a new balance.
Think “repurposing” and “blending.” The future won’t all be e-commerce, nor will it be all brick and mortar. Take the case of Amazon. This online retail giant bought Whole Foods and continues to invest in it to start this integration. They are also actively opening convenience stores in strategic locations with high foot traffic.
Versatility and the ability to roll with the punches will also be necessary for all players going forward. Those who can quickly and nimbly adapt to the change will not only survive but come out on top.
Opportunities for Commercial Real Estate Investors
Many retail owners are starting to look at opening micro logistics nodes and fulfillment centers right behind (or close to) their stores. The idea is to put in-store shopping, the click-and-collect business model, and the fulfillment of purchases made online together in one place. They want to conveniently run their businesses and cater to multiple retail channels from one location.
Such micro-fulfillment centers may help landlords fill retail spaces that have been emptied by the pandemic while helping their tenant-retailers meet the expectations of their customers when it comes to orders made online. Shopping centers are already located close to residential areas and have facilities like parking, so they can easily be repurposed to become essential elements of the supply chain.
Right now, many retail investors are waiting on the sidelines. There’s no denying that a lot is riding on when—and whether—things can honestly go back to the way they were, or if society can settle in on a so-called new normal (and what that might look like).
Transaction volumes are still low, but as a result of the retail sector values declining and industrial costs improving, experts see shifts in investor interest. Many CRE investors are also diversifying in non-traditional sectors such as data centers and self-storage as they move away from traditional retail and office.
Get Funding for Your Project.
Just because the CRE industry is at a standstill doesn’t mean that there are no opportunities. Some of the best investors are still active in the market, looking for deals that make sense at this time.
If you have a commercial real estate project and need to raise money to see it through, contact us here at Capital Investors Direct. We specialize in putting together customized and strategic funding solutions for CRE investors of all sizes in different sectors. Tell us about your project, your funding concerns, as well as any challenges you may be facing. We can leverage our investors’ network to obtain the most sensible capital strategy for your goals and requirements.