What Will Retail Look Like in 2023?

In the third installment of our outlook series, experts take a deep dive into retail real estate trends and challenges.

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The retail sector has remained resilient and continues to rebound from the challenges brought about by the pandemic. With most restrictions lifted, the traditional shopper of 2019 reappeared, albeit with a new perspective on purchasing methods. The enhanced focus on going shopping, buying and returning items through physical stores, but also using digital websites or even social media platforms, has further solidified retail real estate trends such as omnichannel commerce.

Consequently, retailers today are actively investing in methods that guarantee they can meet consumers’ expectations in both the digital and physical realms. A shift in consumer behavior, coupled with economic uncertainty and the ongoing supply chain crisis, seem to threaten the success of retailers—but the overall sentiment across the sector is cautiously optimistic.

“The multiple challenges retail went through over the last 15 years have shown that retail needs to continuously reinvent itself to stay ahead of the game and be prepared for any future opportunities and challenges,” David Jamieson, chief operations officer at Kimco Realty, told Commercial Property Executive.

Redefining 2022 retail real estate trends

Proximity and convenience have been the dominating themes in 2022 as retailers across all categories sought to gain easier access to their consumers, mainly via grocery-anchored neighborhood shopping centers. These can double as hyperlocal fulfillment centers, eventually supporting last-mile strategies, according to Jeff Edison, chairman & CEO of Phillips Edison & Co.

To that end, Brixmor Property Group saw strong demand for space among its core retail categories such as grocery, fast-casual, wellness and value-apparel.

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“The current environment is extremely supply-constrained, which bodes well for owners of well-located retail space in suburban markets—areas where retailers are looking to grow their footprints,” said Brian Finnegan, executive vice president & chief revenue officer with Brixmor. “We have seen more restaurants that have traditionally been in urban markets, as well as mall-based retailers looking to open space in suburban open-air centers, which has led to minimal retailer bankruptcies in 2022 compared to 2020,” he added.

The lack of space has also created opportunities for retail space owners and translated into strong leasing momentum throughout the year. Finnegan saw retailers become open to different store layouts to help expedite store openings, while accommodating curbside pickup and broader shipping needs. This flexibility was and continues to be key to ensuring retailers are able to advance their real estate objectives as physical stores remain a priority­.

“This is another sign that brick-and-mortar is critical to retailers’ omnichannel strategies,” said Najla Kayyem, Pacific Retail Capital Partners‘ executive vice president of marketing. This retail real estate trend is one of the many which helped support the continued rise of same-day delivery as buying online and picking up in-store gained traction.

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Christine Mastandrea, chief operating officer of Whitestone REIT, saw other major retail real estate trends come into play lately, as well. Consumers accelerated the movement toward services over hard and soft goods, which led to upticks in demand for restaurants, fitness centers and educational offerings. While some of this can be attributed to the country’s eagerness to interact and socialize post-lockdown, it is also a generational move toward experiences, as well as self-care and personal improvement.

With services requiring less space than hard/soft goods, the demand for retail spaces between 2,000 and 3,000 square feet increased at the expense of larger retail offerings. Fitness studios such as OrangeTheory are revising their store formats to accommodate shifting consumer demand. According to Edison, members are no longer utilizing showers or lobbies as they once did, so eliminating or reducing the sizes of these spaces allows the business to expand across more stores, thus entering more communities.

Another major retail real estate trend that Mastandrea identified was the move of the medical sector into local retail centers. She noted that Walgreens, CVS, Walmart, Amazon and others are all looking to connect with the consumer on medical needs, with vaccine offerings as a primary example.

“They’re recognizing the importance of medical as part of the local community rather than just being giant medical centers or providing online services,” she mentioned. “Houston has the world’s largest medical center and yet we’re seeing a proliferation of medical services within local shopping centers.”

Downturn & other challenges ahead

Supply chain disruptions, the fiscal stimulus and the resulting strong demand, combined with geopolitical challenges, have all led to a rapid rise in inflation which is impacting every sector of the economy. While some inflation can be beneficial to retail, price increases in the double digits or even high single-digit are hurting the consumer—particularly on the low end—particularly when wages don’t keep up, Edison noted.

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As it relates to grocery-anchored retail—where Phillips Edison & Co. exclusively operates—inflation and interest rates continue to impact both the firm’s cost of capital and the expenditures it needs to make to execute its development, redevelopment and reinvestment plans. The company is more cautious about where and how it chooses to invest today, but Edison believes good acquisition opportunities will likely start to show soon.

“A potential recession is something we are paying very close attention to. We are encouraged that the consumer has remained resilient throughout 2022. This is clear from the traffic patterns we are seeing at our centers, 70 percent of which are grocery-anchored,” Finnegan added. “We benefit from housing tenants that serve the daily needs of shoppers to the extent we begin to see more people opting to eat at home, these decisions bode well for our grocery tenants.”

Preliminary data on holiday sales is showing conservative shopping habits. Inflation has made everything more expensive, so people sought out deals to help offset increased costs, according to Kayyem. Inflation remained top of mind as customers continued to look for value. Going forward, we’re likely to see less spending on non-necessities, while spending on groceries and necessity-based goods and services is expected to continue outperforming, Edison mentioned.

A recession will create a higher demand for more value-oriented retail as it did in 2008, but likely to a lesser degree. At that time, rents and land prices came down, and we also saw more landowners willing to sell rather than ground lease,” Andy Misiaveg, partner at The Shopping Center Group Charlotte, told CPE. “We anticipate the record occupancy rate to moderate somewhat in 2023, which will create opportunity for prepared retailers.”

Another major issue that must be addressed in the future, according to Finnegan, is the rise in organized retail crime. This requires a multipronged approach that requires a collaboration between retailers, landlords, local law enforcement and community groups. Shoppers and citizens want safe environments, but the issues behind the surge in crime in certain communities are complex. A one-size-fits-all approach is not feasible, and multiple diverse perspectives must be brought to the table.

Retail real estate trends in 2023

While the looming recession has put some players in the retail industry in a wait-and-see mood, a lot will depend on the economy’s future performance. The outcome will define the impact on businesses, particularly small shops that may not have the balance sheet to carry through a prolonged downturn. On the other hand, consumer balance sheets are still strong from a variety of perspectives, and that should support spending, Jamieson noted.

“Retailers are expected to continue to source space as they want to be in a position to hit their growth targets as the economy starts to stabilize…We are seeing demand for our space from a variety of sectors, including beauty, off-price, entertainment, coffee/food/restaurants,” Jamieson said. “With no new development supply on the horizon, the remaining COVID-19 inventory is the available opportunity for these retailers.”

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In that regard, TSCG believes that while there will be an ongoing lack of new product being delivered in 2023, construction costs will start softening in mid-2023 and land costs will stabilize or dip. This should help open the doors for more retail development.

“In 2023, retail tenants should expect high rental rates to continue. Restaurant users can also expect the demand for drive-thru space to continue to dominate this sector as more fast-casual tenants are transitioning to this model,” said Kelsey Reynolds, associate at TSCG. “New space availability in 2023 will likely revolve around non-anchored shopping centers and be more prone to single- and multi-tenant buildings on smaller sites.”

Another retail real estate trend worth mentioning is delivery services carving out a niche in the post-coronavirus environment with retail space. For example, DoorDash is opening DashMart, a convenience store concept that acts as a warehouse for dashers in the area. These stores aren’t open to the public.

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TSCG also expects to see growth in the resale market. Consumers will lean into this sector from the influences of inflation and sustainability benefits. Dick’s Sporting Goods launched an in-store buyback program for outdoor gear this year, and other retailers incorporating resale into their business models are expected to follow suit.

AI-driven technology is also likely to grow in importance to retailers. This is because today’s customers are channel-agnostic and have thousands of brands and retailers to choose from for any product. This, in turn, has heightened their expectations from retailers. From seamless check-outs, price matching and highly engaging content, to timely delivery and returns—customers expect hassle-free and customized experiences across every channel, Kayyem noted.

Experts believe the supply chain issues will begin to moderate in 2023, although the supply-demand imbalance is here to stay. According to Finnegan, landlords must closely examine their portfolios and determine the highest and best use for their centers.

“Those who are able to support retailers’ aggressive growth plans will be the ones to benefit, while those who are slow to mine their portfolio for opportunities will risk missing out on growth,” he concluded.

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