By the Numbers Retail

Retail Resilience

In-store shopping isn’t going anywhere, even if e-commerce will continue to grow.

The apocalypse was supposed to be upon us. A combination of pandemic-induced lockdowns and the growing competitive presence of e-commerce would bring obsolescence to the brick-and-mortar shopping experience, right? Vacancy rates would rise, and rents and property values would tumble. The saving grace for owners would be repurposing, but even that was shrouded in uncertainty due to the necessity of large capital infusions and the presence of restrictive zoning laws. 

Fast forward 18 months and it comes as a surprise to many that the apocalypse has been canceled. The retail sector of commercial real estate is holding steady. The vacancy rate, while slightly elevated from its long-term average of about 10 percent, is now hovering around 10.5 percent and is even showing signs of trending downward. This steadiness is due to both the demand and supply sides of the equation. While net absorption declined a bit during 2020, the level of stress pales in comparison to the sector’s experience during the Great Financial Crisis more than a decade ago. On the supply side, inventory growth for retail has slowed considerably during the last 18 months and even prior to the pandemic. Due to uncertainty surrounding the sector, developers have proceeded with caution over the last few years, and this has undoubtably helped prop up performance of existing properties while buoying optimism for the sector. 


While steadiness at the national level is certainly a positive, we are not so naive as to suggest that headwinds do not exist, or that all assets will perform equally in the coming years. E-commerce has slowly but surely become a greater presence in our society and will undoubtable place negative pressure on the sector. The e-commerce share of total retail sales has increased from about 1 percent at the turn of the century to its current level of a shade over 13 percent. It’s also interesting to note that the level peaked at only 15.7 percent during the COVID-19 lockdowns. Yes, some malls were closed, and a smattering of households ordered their groceries online for the first time, but overall, people still found their way to brick-and-mortar retail as needed.

As the pandemic has waned, especially during the spring and summer of this year, shoppers, many flush with stimulus cash, enthusiastically embraced in-person experiential retail (including eating and drinking establishments). But that wasn’t all — sales figures show an uptick in apparel and department store spending. Consumers were buying products in person that they could have been purchased online. This certainly has given brick-and-mortar retailers hope that shopping habits may not have permanently shifted. With this said, we still expect e-commerce’s share of the market to increase, likely to 20 percent by the end of this decade, but the growth path is likely not as severely sloped, and the equilibrium level may not be as significant as many once thought.


Still, laggards do exist in the retail industry, which have ramifications for asset performance. A common occurrence during economically difficult times is an acceleration of the clearing out of struggling firms or industries. This phenomenon is undoubtably happening now. Twentieth-century stalwarts of the retail landscape are now giving way to a new breed. Traditional department stores such as JCPenney, Sears, and Macy’s have closed many of their locations and are looking to renovate or alter their business model to remain relevant. But other retailers are expanding their footprints. Target continues to enter more urban areas, Dick’s Sporting Goods has found life in a new breed of outdoor enthusiasts, and even companies such as Nike have found value in created showroom and customization space in this new era of retail.

It was clear in the data that larger, well-kept properties in locations with quality transportation infrastructure were holding up very well against the barrage of e-commerce competition.

Variation at the asset level has also been noted, in particular with indoor shopping malls. In a recent research paper, Moody’s found a strong correlation between space market performance and certain characteristics of the property like age and size, as well as characteristics of the tenant mix. It was clear in the data that larger, well-kept properties in locations with quality transportation infrastructure were holding up very well against the barrage of e-commerce competition. In contrast, older smaller-scale malls with limited tenant and experiential diversity have tended to struggle. 

In summary, brick-and-mortar retail real estate is far from dead. We are noticing an evolution and an exposure of weak assets at least partially due to the pandemic, but the sector still has a solid mid- and long-term future. After a bumpy next year or two for retail, we expect the national vacancy rate for the sector to trend back down toward a sub-10 percent level and rents to grow at a reasonable average of about 2 percent per year. 

Thomas P. LaSalvia, Ph.D.

Senior economist at Moody's Analytics Reis.

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