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Retail Resurgence: Why 2023 May Be the Right Time to Buy
Despite wider challenges to CRE, the sector is set for a strong 2023, driven by a resurgence in demand in experiential retail alongside evolving consumer preferences.
Retail's outlook has massively changed in the past year. Find out why it might be time to consider adding this asset type to your portfolio.
Retail's Performance in the Post-Pandemic Era
The retail real estate market is showing remarkable resilience — even despite e-commerce growth. A JLL report from the fourth quarter of 2022 revealed retail tenants absorbed 76 million square feet of space last year. That's about double the pre-pandemic figures.
Retailers and service tenants are expanding their footprints, anticipating a return to spending as consumers focus on necessities and experiences.
Lower Vacancy
Nationally, retail's vacancy rate reaching a low of 5.6% in early 2023. This trend, driven by strong tenant demand and limited new construction, may soon reach its lowest point, as demand is expected to recede due to a potential recession, tighter financial conditions, and the phasing out of some post-pandemic consumer spending drivers, according to a first-quarter report from Cushman & Wakefield.
Consumer spending could be impacted by weaker job growth or declines in the challenging economic landscape — though this largely has yet to materialize. Although inflation has been significant, households are largely positioned to weather it thanks to the uncharacteristically strong job growth. However, an anticipated recession may result in unemployment, diminished income, and more cautious retail spending.
Despite these challenges, certain retail segments, such as value retail, ultra-luxury, and consumer services, are expected to remain strong. As discretionary spending slows, consumers are pivoting towards service-based consumption, benefiting sectors like health and wellness or experiential retail, which drive foot traffic in shopping centers.
The Rise of Experiential Retail
As explored by Commercial Property Executive, Gen Z consumers crave in-person experiences and interactions with brands, driving the growth of experiential retail. Technology continues to play a crucial role in enhancing the consumer journey.
The line between stores, restaurants, and event spaces is blurring, leading to innovative multi-sensory encounters with brands. Developers and landlords now view their centers holistically, curating spaces as part of a total shopping and lifestyle experience.
Retail Categories on the Rise
As the retail landscape continues to evolve, certain retail categories have experienced significant growth. In 2022, the top retail categories announcing openings included restaurants, discount goods stores, grocers, and apparel stores. Each of these sectors has capitalized on emerging consumer trends, such as the preference for affordable products and the resurgence of in-person dining.
Restaurants, in particular, have made a strong comeback. While it may feel like the pandemic was years ago (and in some respects it was), restaurant activity is still climbing as more people feel comfortable dining out. The restaurant industry has also adapted to new consumer preferences by offering diverse cuisine options and incorporating technology to streamline the ordering process and improve the overall dining experience.
Discount goods stores have capitalized on the continued demand for affordable products. As inflation has impacted consumer spending, these retailers offer an attractive option for shoppers who want to stretch their budgets without sacrificing quality. This sector's growth reflects consumers' changing priorities and the desire to find value in their purchases.
Grocers have also seen increased growth as they continue to adapt to the ever-changing needs of consumers. Many have expanded their offerings to include organic and locally-sourced products, catering to a more health-conscious demographic. Additionally, the rise of online grocery shopping has pushed traditional grocers to innovate their services, such as curbside pickup and delivery options.
The apparel industry, which saw a decline during the pandemic‚ has rebounded with a focus on athleisure and casual wear. This trend reflects the shifting preferences of consumers who value comfort and versatility in their clothing choices. Athleisure concepts, in particular, have gained popularity as more people prioritize fitness and wellness activities in their daily routines.
Experiential tenants, such as theaters, fitness centers, and entertainment venues, experienced significant traffic increases in 2022. With the growing appetite for in-person experiences, these businesses have benefited from consumers seeking engaging and immersive activities. As the retail landscape continues to evolve, it's clear that these retail categories will play a crucial role in shaping the future of the industry.
How to Finance Retail Investments
When looking to finance retail real estate investments, there are a lot of options to consider. Many investors look to traditional bank loans, but there are many more, often better, financing choices out there.
Bridge Loans
Bridge financing can be expensive, but it's invaluable if you're seeking to acquire an unstabilized asset. While you'll pay higher debt servicing costs, you'll also be able to refinance quickly, at better terms, once your property is occupied.
Bank or Credit Union Loans
The most common loans for retail properties are those from banks and credit unions, whether local, regional, or national. Bank loans differ wildly from institution to institution, and it may take some serious groundwork before you find the right lender for your niche.
That said, if you do find the right lender, you may be able to get financing with some of the best terms available for your retail property. Don't want to shop your loan around personally? We can do it in a heartbeat.
Private Lending
Another financing option for retail properties is private lending, which involves borrowing from individual investors or non-bank entities. Private lenders can offer a more personalized approach, catering to the specific needs of your retail investment. It's important to note that private lending terms can vary greatly, so thorough research is necessary to find the right fit for your project.
The benefits of private lending include flexibility in loan structure and potentially faster approval times compared to traditional banks or credit unions. This can be particularly useful for investors who require a more tailored financing solution or who are seeking capital in a time-sensitive manner.
However, private lending may come with higher interest rates and fees due to the increased risk associated with non-traditional lending. Despite this, the right private lender can still provide valuable financing options for your retail property.
SBA Financing
SBA financing can be highly attractive options for retail investors, specifically through the SBA 7(a) and SBA 504 loan programs. These loans are designed to support small businesses in acquiring or expanding their commercial real estate. However, there's one very important requirement: The property must be owner occupied.
The SBA 7(a) loan is a versatile financing solution that can be used for various purposes, including purchasing or refinancing commercial real estate, as well as working capital, equipment financing, or business acquisition. These loans typically offer competitive interest rates and longer repayment terms, making them an appealing option for retail investors looking to secure funding for their business operations.
On the other hand, the SBA 504 loan program focuses specifically on financing the acquisition, construction, or improvement of commercial real estate and fixed assets. This program offers low down payment requirements and long-term, fixed-rate financing, providing retail investors with a stable and predictable payment structure.
Either SBA 7(a) or SBA 504 loans can be excellent choices for retail investors who qualify as small businesses and plan to occupy their commercial properties. Fill out the form below, and our SBA loan experts can work with you to tailor a solution that meets your needs.