Residential real estate boom paves way for increased retail demand – Real Estate & Construction
United States: Residential real estate boom paves way for increased retail demand
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After years of pessimism about the retail market, industry leaders report growing optimism about demand for retail space in the Allen Matkins Winter 2022 Survey/ UCLA Anderson Forecast California Commercial Real Estate Survey. According to the survey results, retail developers have strong growth opportunities across the state, especially in areas where booming residential development is increasing demand for retail businesses. The greatest levels of optimism came from respondents in East Bay, Silicon Valley, Orange County and San Diego – markets with low unemployment rates.
The WarnerExecutive Vice President of Capital Markets, Retail for Colliers International, and Anthony Burney, Real Estate Partner at Allen Matkins, discuss takeaways from the survey and what lies ahead for this sector.
1. Retail benefited from the strength of the multifamily market
During the pandemic, there was a noticeable shift in population from urban areas to suburban neighborhoods, where people could disperse. These new residents were not just buying single-family homes; they have also increased the demand for multi-family properties. This created additional foot traffic for places like grocery stores, gyms and salons. “The strength of multifamily has benefited from the development of retail,” Burney says, adding, “Retailers who have been able to provide these services have been successful during the pandemic.”
According to Burney, the influx of young residents moving to the suburbs has created many opportunities for retailers. Its customers reported an increase in foot traffic during the week as people shopped more frequently, often during their lunch breaks and after work. Returning to the office is still uncertain for some companies, and employees who continue to work from home will likely continue these new shopping practices well into 2022.
2. Neighborhood malls are booming
Warner expects the strongest growth in 2022 to occur in cities that have been hardest hit during the pandemic, such as San Francisco, Boston and Washington, DC. “Most of the other markets have rebounded,” he said. Like Burney, he sees growth in neighborhood malls. “The spaces anchored in groceries and net leases are still strong,” he says.
“Development is back,” says Warner. “We’re starting to be able to build those assets for optimal use.” This includes multi-family and mixed-use spaces as well as brick-and-mortar retail. Construction costs can affect how quickly these projects come to fruition, as there are still significant fluctuations and inflation in the price of materials. However, local governments are actively working to support these efforts to generate tax revenue from retail revenue.
3. The commercial space market is changing
The recent growth in retail is very directly linked to the pandemic. Local restrictions, population movements and competition from e-commerce sites have forced retailers to reconsider their operations. They are looking for a space that allows for more outdoor concepts in a post-COVID world. So developers are working feverishly to reconfigure spaces to meet these new demands.
According to Warner, the shopping center sector is finally showing signs of stabilization. Landlords and property developers have redeveloped spaces, and the supply of vacant malls is eventually dwindling as rental demand increases. He adds, “Owners now have a great opportunity to sell their land and buildings.”
4. The retail sector still has potential for investors
The retail market has changed over the past few years and Warner believes it was undervalued at the start of the pandemic. “It took a pandemic to prove the resilience of the sector,” he adds. “Asset classes across the sector are showing strong rental and investment activity.” More stores opened last year than closed – the first time since 2015. He notes the $20 billion investors invested in retail space during the third quarter of last year to highlight this point.
Burney saw a similar move. “Trading volume over the past 12 months has been significantly higher than it has been over the past two years,” he said. So far, rents haven’t risen as much as landlords wanted, but many spaces that sat empty for years are now coming back to life.
For now, he offers this recommendation: “Retail developers just need to continue to be nimble and adapt to changing consumer needs.”
Co-written by The Warner Executive Vice President Colliers International
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