In this fifth and final article of a five-party series, experts share their retail sector outlook—and ICSC commentary—with Connect CRE. The other articles, “Investors, Stores and Restaurants: An Increasing Mix,” “Understanding the Retail Sector: Where We’ve Been and Where We Are,” “Retail Economics: Supply, Demand and Consumer Dollars,” and “Just what IS the Best-Performing Retail,” are live.

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Consumer spending seems to be robust. At least according to the recently released gross domestic product estimate. Ongoing spending—especially in the face of inflation and higher prices—is one reason why experts in the retail space told Connect CRE that their outlook remains bullish. Additional fundamentals also demonstrate the ongoing strength of retail and underline its turnaround from the pandemic doldrums of 2020 and 2021.

“The overall outlook for the retail sector is extremely positive,” said JLL’s Executive Vice President and National Agency Retail Lead Chris Wilson. “Excluding a consumer recession, we should expect explosive retail activity in development and acquisitions in the next 24 months.”

Scarce Space Continues

The main issue with retail these days is the ongoing lack of space. Cushman & Wakefield’s Q2 2024 U.S. National Shopping Center Report noted a 5.3% vacancy rate, with just 11.3 million square feet under construction. The report said the lack of new supply coming online will keep availability tight.

Robert Myers, president of Phillips Edison, explained that supply scarcity has existed for at least a decade. These days, “current economic returns don’t justify new construction,” he noted. He added that many of the retail spaces in the Phillips Edison portfolio have a tenant waitlist.

On the other hand, retailers are on track to continue expanding however they can. “They’re continuing to grow as they open new locations in suburban centers that are closer to the consumer,” Myers said.

Differences in Retail

Diving a little further into the different kinds of retail, the experts said that necessity-based stores (think grocery and similar offerings) will continue to perform very well. “No matter the economic climate, people need to buy groceries and get their nails and hair done,” said Coreland Companies’ Principal Matthew Hammond.

Another plus for grocery-anchored centers is the tenant mix. While different offerings appeal to consumers, “investors like the large mix of tenants,” Hammond pointed out.

But not all shopping centers will excel during the outlook. Hammond explained that the “A” shopping centers, which are well-located and offer experiential retail, should thrive. “The ‘B’ and ‘C’ centers will struggle,” he added.

In addition to the grocery-anchored centers, Myers said he sees quick-service restaurants, health and beauty locations and medical retail performing well. “These offer affordable and easily accessible options for consumers looking for convenience at every turn,” he noted.

The Evolution—and Economics—of the Sector

Another important issue impacting the outlook is the evolution of the retail sector. While the pandemic changed many ways in which consumers choose to shop, that shift has been ongoing for a while.

On the economics side, Melissa McDonald, principal with The Providence Group, explained that those in the retail business have experienced at least one recession and other economic fluctuations. “Retail commercial real estate generally does not attract people who are not resilient and positive in their long-term approach,” she said.

“A report from Deloitte reveals the disruption to consumer loyalty and changes in shopping patterns as bargain hunters move from retailer to retailer,” observed Primestor’s Director of Leasing Rhiana Lindsey. The retailers that succeed are those who can provide the right customer experiences. Additionally,” as retailers increase their use of technology, this will drive loyalty and operational efficiency,” Lindsey said.

The experts commented that another factor that could further improve the retail sector is the Federal Reserve’s actions. At its late July 2024 Federal Open Market Committee (FOMC) meeting, the Fed decided to keep the Effective Federal Funds Rate (EFFR) at its 23-year high of 5.3%, where it’s been since July 2023. At the same time, Fed Chair Jerome Powell hinted that there might be an interest rate cut in September 2024.

While a single interest rate cut won’t mean a sudden and massive increase in retail transactions and development, Wilson said it could generate “a greater amount of activity.” Added McDonald: “We’re hoping there is a shift in the interest rate environment, which would obviously be impactful on new development.”

Meanwhile, retail is positioned to weather potential economic issues, barring a lengthy or serious recession. “There are always ripples in consumer spending,” Providence Group Broker Darrell Palasciano said. But I think we’re probably positioned to absorb it in a soft landing, even if the retail sector gets hit again.”

Insights from the ICSC

The experts also shared observations from the May 2024 ICSC conference in Las Vegas.

Hammond found the discussion points over approvals interesting, especially regarding tenants like restaurants, medical-retail and entertainment. “These deals require many levels of approval, including zoning, ADA and permits.” Buildouts are also required for some of these tenants, which prolongs the approval processes. “Negotiations are challenging, as both landlords and tenants are working to push the risk to the other party,” Hammond added.

Wilson and McDonald said that the two most significant topics discussed were—perhaps unsurprisingly—interest rate speculation and lack of available retail space. “Also asked was the viability of developing new retail in the next three to four years, and uncertainty with construction costs,” McDonald added.

Despite the scarcity (and an environment of higher operating costs), Myers’ ICSC takeaway was that retailers continue to open new locations and are planning for future growth. “In some cases, they’re planning into 2027,” Myers added.

As a result, “the message and vibe of ICSC this year was that retailers seem to be chasing the developers and owners for space,” Palasciano said. “Tenants are looking for space, and there’s no one who is offering them any space.”

Palasciano added that in attending multiple ICSC conferences, this was the first time he saw more retailers reaching out to meet owners than the other way around. “That was a nice change of pace,” he added. “I just wish I had more space available to lease to them.”