Despite on-line retail sales gains during the COVID pandemic, brick and mortar locations remain the primary channel for consumer purchases in the United States. With limited new supply, steady unemployment and consumer wage growth, most markets remain in balance.

Consequently, retail shopping centers, with the exception of B/C malls, continued to perform well on a national level and in the D.C. metropolitan area through Q2 2023. According to Cushman & Wakefield’s Shopping Center Marketbeat report, the national vacancy rate measured 5.4%, its lowest level since 2007. The vacancy rate in the D.C. metro area stood at 4.6%, compared to 5.4% twelve months earlier.  The market segment experienced its tenth consecutive quarter of positive absorption nationally. D.C. also experienced positive net absorption through Q2 2023. New retail construction remained subdued, as just 4.0 million square feet was delivered nationally and 103,316 square feet in the D.C. metro area through Q2 2023. Generally, tenants face a supply side constraint and must seek out available space in existing centers.

According to Cushman & Wakefield, consumer and tenant trends also favor retail, noting “Retail CRE is at low risk of a major disruption over the next few years. A potential downturn in 2023 would have very different implications for retail real estate compared to past cycles. Household debt burdens, as a share of income, are about 20% below where they were prior to the Global Financial Crisis in 2007, meaning that a widespread consumer crisis is unlikely….Additionally, the rapid rise of e-commerce that disrupted retail CRE from 2010 – 2019 has become a more integrated part of retailers’ sales strategies, so the threat to store demand is significantly lower.” The consensus is that consumer confidence remains strong, consumers continue to spend and that they’re spending in person. 

According to Gary Glick of Cox Castle in that firm’s 2023 Forecast, grocery-anchored community and neighborhood shopping centers – particularly those in primary or high-population growth markets – represent the best opportunities in retail. These properties are typically leased to tenants that offer goods and services that people require as a part of their regular routines, as well as coffee shops, restaurants and fitness operators that provide “experiences.” People living or working nearby generally favor convenient options and support these businesses. Repeat visits and purchases build personal relationships with employees and reinforce customer loyalty. These businesses also are less susceptible to cannibalization from on-line shopping – even home delivery is in decline as shoppers increasingly are unwilling to pay service fees charged by third-party providers.

The grocery segment demonstrated remarkable strength over the pandemic, with year over year visits to the category increasing for much of 2020 and 2021. The pandemic also saw a rise in “mission driven” shopping, where consumers adopted a more strategic approach to outings and lengthened the median visit duration.

Although grocery sales have slowed with the rise in inflation, the mission driven shopping trend has continued over the past 12 months, as consumers recognize the potential value of each shopping trip. Grocery visits also remained steady in Q2 2023. According to Placer.ai, although value formats have benefitted to the detriment of more quality-focused grocery retailers, consumers place a premium on the quality of the shopping experience and seek out experiential offerings - they even will dedicate leisure time for the visit. Consequently, centers are thriving that provide a more convenient and personalized shopping experience, with a strong emphasis on fresh, locally sourced food and complementary co-tenancy. A key measure for properties is “average dwell time” as trips to the grocery store and pharmacy are pared with visits to restaurants, specialty stores and fitness studios.

Cushman & Wakefield notes that the evolution in shopping centers’ tenant mix will have a stabilizing impact on properties during a potential economic downturn in the coming months. It notes, “Shopping centers contain a broader set of tenant types than they have historically, including a more diverse mix of everyday services…a trend which has been aided by an increase in hybrid work and revived population growth in America’s suburbs.”

Amidst all of the uncertainty in the Commercial Real Estate space, many economists and industry professionals recognize the investment opportunity presented by neighborhood shopping centers. Per Jim Dillavou of Paragon Commercial Group, well-executed neighborhood retail offers stable, predictable returns. He writes in a recent Connect CRE article, “Necessity retail has re-emerged as a favored asset class because real estate investment fundamentals matter once again. Current yield matters. Contractual growth matters. Operational expertise matters. Cash flow matters. The once mundane is again en vogue. Taking risk and chasing yield has been replaced with solid, bottom-up underwriting. Necessity retail – with its perpetually high barriers to entry – continues to stubbornly produce consistent investment returns.”