From challenges caused by the pandemic to a growth in ecommerce, the retail market has seen a variety of changes over the past several years. Moving into 2023, retail markets are likely to see a number of new trends, and to learn more about what these could look like, The Registry spoke with El Warner, vice chair at Colliers’ Irvine office.
Retail needs have changed over the course of the last several years with the growth of e-commerce and the COVID-19 pandemic. What trends can you say have emerged during 2022 that are of note?
Retail is back! The impact of e-commerce over the last several years has been overstated, and the pandemic proved retail’s resiliency. The peak of an online marketplace and the combination of a global pandemic, keeping shoppers inside their houses, had many concerned that it would be the doom of retail.
Instead, vacancy across the U.S. is less than five percent; there are more store openings than closings, rent collections over 95 percent, market rent growth over four percent, and retail fundamentals are robust as of the end of 2022.
Retailers have received master’s degrees in resiliency. They are utilizing new tools and strategies to implement those lessons and improve their offerings of goods and services, ultimately driving the shopper back into brick-and-mortar locations. Sales have been and will continue to be strong and follow the retailers creating the right shopping experience. Even with the increase in interest rates, I expect we’ll experience a strong holiday season, and continued capital investment into the asset class will remain.
What do you think will happen in 2023 in terms of leasing rates?
As we continue to see strength among retail consumers and headwinds in developing new centers (construction costs are still cost-prohibitive to many new developments within in-fill markets), I expect rents to grow between three to five percent in 2023. Statistically, that may be below 2022 rent growth as many prominent owners have reported that new and renewal rents were significantly above their projections and over five percent in many of their assets.
What characterizes a successful leasing deal these days, and will that evolve in 2023?
The lack of available spaces and the rent increase presents a suitable positioning for a retailer. Additionally, getting a retailer to invest in their location while allocating some of their funds in the build-out will continue to create loyalty to the center. While higher rents are always favored, a healthy retailer is far more valuable. Other economics could prove more viable than the face rate, such as building rent escalations into a lease more significant than four percent or Consumer Price Index (CPI) to offset the potential for inflation to eat into your returns.
What surprised you the most over the last 12 to 18 months? Do you think that trend will continue into 2023 and beyond?
The strength and enduring fundamentals were an affirmation of the power of the retail space. More surprising has been the continued strength of investment sale pricing despite the significant increase in the cost of debt. This is just a function of the demand to own retail with the lack of sellers in the market.
How did 2022 end for you and your team? Was it as expected or were there some surprises along the way, too?
As the lead of Colliers’ Retail Capital Markets in the Southwestern U.S., operating nationally, we are the firm’s top Retail Investment Team in 2022. Our anticipated total volume far exceeds 2021 levels. This incredible achievement is one I am immensely proud of, especially given the debt costs. Our team’s success is a testament to reinvesting in our people and processes to solve problems and create value for our clients.
As you look at the market dynamics in 2023, what do you think will be the most significant things that will define the industry in the coming year?
The sharp and continued interest rate hikes are designed to decrease demand, stabilize pricing, and control inflation. While necessary, I am watchful of how this will impact sales at brick-and-mortar locations and how that could potentially soften fundamentals. Overall, I do not see this as worrisome but as a return to normalcy.
What opportunities do you see in the coming year, and how are you and your team preparing for the year ahead?
It is an excellent time to buy retail assets whenever there is market uncertainty. Although the cost of capital fundamentals is vital, investing in this space is all about timing. In that same light, while it is somewhat nervy to invest, our team continues to hire new members and attract top talent. This is the time to reinvest in your people.
A year from now, what do you think we’ll be talking about?
In June 2020, I would never have predicted the opportunity to speak to such a resilient retail market in June 2021. So, in the same vein, I couldn’t predict what the discussion will be this time next year. Still, I am hopeful for continued talk of our team being stronger than ever before, and with the cooling of interest rate hikes, we see unprecedented revenue and market share growth.