I hope your year is going well! Welcome to the inaugural 2024 issue of The Voice of Retail. I stepped into my new role as Retail Leader for the Americas at CBRE in September and love the practice, our team, the progress we are making and the immense potential ahead.
This is our first cut at bringing back “The Big Email," which some of you may remember was a long-form email from me focused on what I'm seeing on the ground, reading and thinking about, and synthesizes those trends for the "so what." I question conventional wisdom, reframe the usual premise and aim to ask unvarnished, thought-provoking questions about (sometimes) under-the-radar issues that drive opportunity and risk. Expect the issues to vary, from time to time, as dynamically as our industry does.
Current Headwinds Are Inspiring Optimism
Retail faces numerous constraints. For many retailers, a dollar invested in new stores is still the most productive, highest-impact dollar spent. But with national available retail space at an all-time low of 4.7%, those opportunities are increasingly scarce. Just 14 million sq. ft. of new multi-tenant retail space is scheduled for delivery this year — half of the projected demand. Retail space per capita hit a multi-decade low in 2023, with more than 130 million sq. ft. of space demolished over the past five years. This has occurred as retail sales have continued to climb. Even excluding e-commerce volume, retail sales per sq. ft. are up over 31% since 2019 (an all-time high), up 49% since 2006 and up 69% since the 2009 trough. Meanwhile, retail space per person has remained stable since 2005.
"Constraints inspire an explosion of creativity. We anticipate at least a few years of innovation among property investors and retailers, and a renewed focus on quality to grow sales and impressions."
Keep in mind that retail sales are expected to grow an estimated 9% to 10% over the next two years, while retail space per capita is forecasted to remain flat. These trends are sure to give pause to those who like to parrot the phrase, “The U.S. is over-retailed.”
With the Federal Reserve raising the benchmark federal funds rate 11 times between 2022 and 2023, money is no longer free, and costs are up: construction, food, shipping, supply chain, repair and maintenance at older properties, the rate of shrink and the investments required to combat it. Labor is both pricey and scarce: Job openings within the construction industry averaged about 450,000 in Q4 2023, an all-time quarterly high. At the same time, there's a scarcity of land suitable for retail development.
So why are we optimistic?
Because constraints generally inspire an explosion of creativity. We anticipate at least a few years of innovation among property investors and, most critically, retailers. We will see a renewed focus on quality, from all parties, to grow sales and impressions. While we may not see immediate impacts in 2024, we expect this to play out in novel strategies over the next few years.
Product
As brands try to deliver on promised growth without as many new stores, they'll get creative with product assortment, new categories and higher-margin, private-label goods. Having a quality product, whether physical or otherwise, will become a critical differentiator. A store can push the envelope on creativity and overall experience all it wants, but if the product isn’t strong, good luck.
Location and Space
Despite immense pressures to open new stores, retailers are likely to remain more disciplined than in past cycles, adhering to markets and locations where their confidence is high. However, they may consider secondary and tertiary markets, where space is more abundant and demographics and psychographics make sense. (Tertiary markets — those with less than 1 million people — captured 62% of total net migration between 2019 and 2022.) The importance of data and consumer analytics will rise as brands are forced to get more creative on location. Brands may also consider desirable smaller spaces in prime areas, explore novel store configurations, and look to modernize high-volume locations.
Operations
We're watching for advancements in supply chain; labor and labor-cost management; methods to combat shrink and inventory management to ensure retailers have fewer items to dispose of at a discount at the end of a season. We hope to see better alignment between landlords and tenants at both the store and property level around driving consumer traffic, boosting sales, tackling shrink and improving operational efficiency. The best outcomes will require collaboration.
Municipal Subsidies and Renewal
We are watching for public-private experiments to make new development pencil. In cases where the numbers work without subsidies, investors may expand efforts to tackle obsolescence, an area of ongoing reimagination that has given the office sector plenty to consider. Investors will also capitalize on store closures, which, rather than serving as evidence of a “retail apocalypse,” are more often related to capital structure or debt than underlying product or service demand. (Even when the issue is underperformance, store closures promote industry health, opening up sales — and arguably capital — for more efficient brands that are better able to compete in today’s retail landscape.) For some REITs, rent spreads have grown from 4% to 6% pre-pandemic and are now often in the mid-teens.
All of these strategic moves will demand the industry refocus intensely on the fundamental source of its growth and profitability: the consumer.
It Starts with the Consumer
The real estate industry has largely been driven by wherever capital wants to go, and today, retail is once again the darling. Some argue that retail is more battle-tested and values have reset. Even major capital advisors are looking at retail as a core asset class again. More pricing visibility will inevitably coalesce into increased trades. But the amount of capital on the sidelines isn't necessarily correlated with the quality or volume of retail opportunities.
As a result, a problematic equation plays out: Investors chase retail, landlords convince brands to lease space, brands (and landlords) try to persuade consumers to visit. It's problematic, because it's backwards: Retail success has to start with the consumer for all parties involved. The better we understand consumers, the more intently we can focus on what they want and need — and what they don't even yet realize they want or need. This laser focus will yield more productive, efficient and sustainable projects and stores. This is true even when we consider that healthy retail property requires a slightly longer investment horizon. The consumer must drive the investment. The savvier property investors and brands are about attracting the consumer, the higher impressions and sales will be, which ultimately translates to higher rents and real estate values. Healthy, productive retail requires alignment throughout the capital stack and between property owners and retailers.
The consumer is at the heart of our Retail practice at CBRE. Our professionals must be not only fluent in real estate and retailing, but also thoughtful observers of human behavior. More than any other property type, retail requires real estate professionals with a profound understanding of the business that operates in the space, who play a mission-critical role in its success. We are specialized by geography (e.g. urban and suburban); price point (e.g. luxury, bridge, contemporary, middle-market, discount/value); product and use type (e.g. grocery, apparel, food and beverage, entertainment/experience, service), and have a deep understanding of the nuances in their area of expertise. We have an increasingly connected and collaborative culture, sharing the best data and insights for the benefit of our clients.
The State of the Consumer
So what do we know today about what consumers want? Convenience and a positive experience are at the forefront, but product quality is table stakes. Some brands, especially services, will see a more diverse customer base in suburban locations versus urban locations, which is amplifying the importance of analytics.
As for consumer health, strong job and wage growth may help to offset the depletion of the unprecedented savings some consumers built up during the pandemic. That could power continued spending, though some analysts suggest it will be focused among higher-income consumers, especially amid concerns about record levels of debt and the end of moratoriums on student loan payments. Monthly employment, consumer confidence and spending numbers are critical to watch, but can also make us myopic. We're following big-picture demographic shifts, from population growth to generational shifts. In 2024, for example, Gen Z will make up a larger portion of the U.S. workforce than Baby Boomers for the first time. Among the latter, real disposable income has boomed: An older adult in 2022 had about 50% more than in 2000. Meanwhile, between 2019 and 2022, people under 35 had the biggest spike in net worth, up 144%.
In coming issues, we'll dive deep into these and other consumer trends that have the most significant impact on your business.
Beyond Real Estate
In this section, I share recent readings that have piqued my interest and delve into insights sometimes beyond, but always relating to, commercial real estate.
Secrets of Japanese Urbanism (Part 2)
A quick and easy read covering: Zakkyo, roughly translated as "miscellaneous" buildings in the dense urban core (including a range of businesses merchandized vertically); pocket neighborhoods, where large, arterial streets or cohorts of buildings are used as firebreaks, resulting in internal zones that are harder to navigate by car, less grid, more organic and more charming to traverse by foot; and bottom-up components to community organization that cultivate more opportunities for discover and delight. It's always good to remember that ideas don't always translate the same across societies and cultures, but there is certainly lots to learn from Japan.
Inside the Crime Rings Trafficking Sand
I have always been fascinated by the formality of informal economies—a captivation that started years ago with Gang Leader for a Day by Sudhir Venkatech. Apparently, sand mining is the world's largest extraction industry, due in large part to the booming global construction industry.
