Residential Real Estate Boom Paves the Way for Increased Retail Demand

After several years of pessimism about the retail market, industry leaders report growing optimism about demand for retail space in the Winter 2022 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey. According to the Survey results, retail developers have solid growth opportunities across the state, especially in areas where surging residential development is increasing demand for retail. The greatest levels of optimism came from respondents in East Bay, Silicon Valley, Orange County, and San Diego — markets with low levels of unemployment.

El Warner, Executive Vice President of Capital Markets, Retail for Colliers International, and Anthony Burney, Real Estate Partner at Allen Matkins, discuss takeaways from the Survey and what lies ahead for this sector.

1. Retail Has Benefitted from the Strength of the Multi-Family Market

During the pandemic, there was a notable population shift from urban areas to suburban neighborhoods, where people could spread out. These new residents were not just buying single-family homes; they also increased demand for multi-family properties. This created additional foot traffic for places like grocery stores, gyms, and salons. “The strength of multi-family has benefitted from retail development,” says Burney, who adds, “Retailers who were able to provide these services were successful during the pandemic.”

According to Burney, the influx of younger residents moving to the suburbs created plenty of opportunities for retailers. His clients reported an increased level of foot traffic during the week as people shopped more frequently, often during their lunch breaks and after work. The return to the office is still uncertain for some companies, and employees who continue working from home will likely continue these new shopping practices well into 2022.

2. Neighborhood Retail Centers Are Thriving

Warner expects the biggest growth in 2022 to take place in the cities that were hit the hardest during the pandemic, such as San Francisco, Boston, and Washington, DC. “Most of the other markets have rebounded,” he points out. Like Burney, he sees growth in neighborhood retail centers. “Grocery-anchored and net lease spaces are still strong,” he says.

“Development is back,” says Warner. “We’re starting to be able to build these assets to the highest and best use.” This includes multi-family and mixed-used spaces as well as brick-and-mortar retail. Construction costs may affect how quickly these projects come to fruition, as there is still significant fluctuation and inflation in the price of materials. However, local governments are actively working to support these endeavors to bring in tax dollars from retail revenue.

3. The Market for Retail Space is Evolving

The recent growth of retail is very much tied directly to the pandemic. Local restrictions, population movement, and competition from online commerce sites forced retailers to reconsider their operations. They are looking for space that allows room for more open-air concepts in a post-COVID world. As such, developers are working feverishly to reconfigure spaces to meet these new demands.

According to Warner, the mall sector is finally showing signs of stabilization. Property owners and developers have redeveloped the spaces, and the supply of vacant malls is finally decreasing as demand for leasing is up. He adds, “Property owners have an excellent opportunity now to sell their land and buildings.”

4. The Retail Sector Still Has Potential for Investors

The market for retail has changed over the last few years, and Warner believes it was undervalued going into the pandemic. “It took a pandemic to prove the sector’s resiliency,” he adds. “Asset classes across the sector are showing strong leasing and investment.” More stores opened last year than closed — the first time since 2015. He notes the $20 billion investors put into retail space during quarter three last year to underscore the point.

Burney has seen a similar movement. “Deal volume over the last 12 months was considerably higher than it has been over the past year or two,” he says. So far, rents have not increased as much as landlords want, but plenty of spaces that have been sitting empty for years are now reactivating.

For now, he offers this recommendation: “Retail developers just need to continue to be nimble and adapt to the changing consumer needs.”