Three Trends Impacting the Future of Retail

Despite economic headwinds, retail real estate has experienced unparalleled growth over the last few years. If you attended ICSC Las Vegas, you felt the energy and excitement surrounding the future of the industry. As complex forces—the economy, inflation, migration patterns, remote work—impact the U.S., retail real estate will continue to adapt. Three resulting trends we are observing carefully include:

1. The Rise of Suburban Retail

• While the days of “shelter-in-place” lockdowns may be long gone, the pandemic left lingering shifts in consumer behavior. In the height of the pandemic, many consumers stayed close to home, rediscovered their neighborhoods and began shopping primarily in their communities. Consumers are continuing to keep their dollars close to home by shopping in their local stores. As such, retailers on once-heavily trafficked commute paths have experienced declining sales revenue. Retailers are taking notes, particularly those in city office districts that rely heavily on daytime foot traffic.
• With more people spending their time near their homes, many retailers have shifted their strategies and are beginning to focus their expansion plans outside of the urban core. CBRE Econometric Advisors found that in the second half of 2022, urban retail availability surpassed suburban availability for the first time since at least 2013. Asking rent growth in the suburbs also outpaced urban areas last year.
• Well-developed suburban areas present a unique opportunity to cater to a clientele that is shopping close to home, and we expect the success of the suburban shopping center to continue.

2. Growth Across Secondary and Tertiary Markets

• Remote work and lifestyle flexibility, coupled with housing unaffordability in larger markets, is driving migration to secondary and tertiary markets. CBRE’s Global Live-Work-Shop Report found that 41% of people who wish to relocate over the next two years desire a more remote location. Similarly, U.S. Census data shows tertiary markets outperformed primary and secondary markets in population gain from 2019 to 2022. Tertiary markets accounted for 47% of total U.S. population growth and 62% of net migration, despite containing just 34% of the total U.S. population.
• Lower land, materials and labor costs and less government regulation in many areas enable cheaper retail development in secondary and tertiary markets than in larger markets. Despite this, foot traffic and sales are often comparable due to less competition.

3. Middle-Market Opportunities

• High inflation, rising interest rates and labor shortages have been persistent challenges throughout 2023. In times of economic pressure, discount and luxury retailers have typically seen success, while retailers in the middle market have seen margin erosion amid heightened competition.
• Recently, however, we’ve seen success in North America from a growing number of middle-market retailers, such as Abercrombie & Fitch, which recently underwent an extensive rebranding, and European retailer Zara. Department store chain Dillard’s has also rebounded, with their strategy of keeping decisions at the family level, limiting discounting and catering to their customer base.
• With the resumption of student loan repayments this fall, many younger consumers will have less discretionary income to spend. This presents an opportunity for middle-market retailers that cater to younger people who can no longer afford luxury retail but also balk at shopping at discount retailers.

With U.S. retail availability and construction starts both at an all-time low, these trends present compelling opportunities for landlords and retailers alike to try out new strategies going into the future. We expect that the impacts of suburban development, the growth of secondary and tertiary markets, and the expansion of middle-market retailers will endure moving forward.