How Retail Responds
As retailers find their footing in 2022, opportunities abound in a sector that faced plenty of challenges during the pandemic.
Exclusive support for Commercial Investment Real Estate podcast in 2022 comes from
Whether it’s increasing outdoor dining or reducing density in offices, high-traffic areas that are a part of everyday life have permanently changed due to the pandemic. This isn’t inherently a positive or negative — commercial real estate professionals will play a significant role in determining the ultimate value of these alterations.
Examining what various commercial real estate sectors can expect in 2022 and beyond, Dan Spiegel, managing director at Coldwell Banker Commercial, discusses the retail market’s prospects in the wake of the COVID-19 pandemic. While shutdowns and public health restrictions have made life difficult for some retail sectors, demand for investment properties looks to remain strong. Spiegel also emphasizes the available opportunities for CRE professionals who can think creatively and find new solutions.
CIRE: As we head into 2022, where does the retail sector of commercial real estate currently stand?
Dan Spiegel: If we can say we are in the post-pandemic era, I think the retail market is still shaking out. I know in the Chicago area where I live, some of the restaurants that went vacant are now replaced by new versions of restaurants. You’ll start to see some retail come back — but there are also areas of retail that are just gone or have transformed. From the demand side, there’s still some question marks as to where we’re headed into next year. Markets change, and I expect demand will return, as long as the consumers are back.
On the investment side, there are definitely opportunities in commercial real estate in the retail segment. It’s not uniform across the country or across all product types, but some product types such as net-lease, freestanding retailers are in high demand. Grocery-anchored shopping centers are also in demand. At the same time, places like regional malls are still struggling, which I expect to continue into 2022.
CIRE: With retail demand hopefully starting to return, is that a positive sign for commercial real estate investors looking for an opportunity in the sector?
Spiegel: If you are the owner of a retail center, for example, you’re looking for that tenant who is going to come in and drive traffic — so not just pay rent but also drive traffic to your center. And as I mentioned, not all retail is contracting. Some areas have struggled and will continue to struggle. But there are new segments, too — for example, the veterinary care business. Everyone’s got the pandemic puppy, right? The demand for veterinary care has exploded across the country over the past 18 months. Also, if you’re in a state where cannabis is legal, that’s another entirely new type of retail use that wasn’t around in many places, say, 24 months ago. That will fill up some retail spaces. As tenants fill up the vacant spaces, the property owners are pleased, and it drives returns for investors.
CIRE: You alluded to retail being a mixed bag as far as the impact of COVID-19. Are there specific things you see in struggling markets that will need to be tackled in order to bounce back?
Spiegel: If you’re a grocery-anchored center, a hardware store, or any kind of essential service that did not slow down during the initial stage of COVID-19, you are certainly still strong. But at the same time, in those grocery-anchored centers, it can be a challenge to find the right kind of other tenants. Some uses are still a bit uncertain — if it’s a fitness center or a restaurant, for example. It’s still a challenge to find users to fill up that last 10-15 percent of a retail center. Different parts of the country have been impacted by COVID-19 in different ways and have reacted with different rules and regulations. There is still some variation that, as an owner or investor, you have to be keen on in order to make sure you achieve the best value for your property.
I recently traveled to New York, twice in the last month, and there’s definitely an aspect of New York City that’s back — particularly street traffic in stores that depend on tourism. But there’s a big difference between urban and suburban. Until you have the hundreds of thousands of office workers coming back to downtown and midtown Manhattan, the restaurants and corner stores that depend on those people will struggle. This is simply because the number of people that those businesses are predicated on aren’t returning to the office yet. In other markets, like a suburban market or a less urbanized market, they can be doing just fine. People obviously feel more comfortable, during the pandemic and as we look to come through the pandemic, driving to work and not being in close contact with other people, which favors suburban markets. It’s not across the board, but markets that depend on that daytime office worker, like Chicago, New York, Los Angeles and San Francisco, will still struggle until corporate America figures out how people are going to come back to work.
CIRE: We saw a bit of a wild card with the delta variant that came along and adjusted the timelines for the return to in-person work. Looking forward, how do you see this shaking out?
Spiegel: Well, I’m going to be an optimist — I’m going to say people will return sooner than later. I don’t know if I’d put that in terms of months, but if you’ve been at an airport, planes are full of people. CBD markets and businesses that depend on the convention industry may continue to struggle until people are willing to attend conventions in person, which some people are. But the question is, will it be in the same numbers as before COVID-19? Will they be satisfied with fewer conventions because people have gotten used to virtual meetings? We have a ways to go. And, frankly, it’s not just me predicting what may happen — it’s individuals making the decision to attend and companies allowing or encouraging their employees to travel and attend group events.
CIRE: Looking back at retail, what lasting impacts will COVID-19 have on brick-and-mortar stores versus e-commerce?
Spiegel: You know, people like to go shopping. It is a hobby for some people. It is not just a practical need — it is about going out in public to see and touch certain types of goods. If you’re going to buy a guitar tomorrow, for example, I doubt you’d be buying it online. You’d want to go to a music store. There’s a certain part of the retail business that is alive today and will continue to be sustainable in the future because it’s predicated on the in-person experience. Buying clothes is similar — as much as you can buy things online, try buying a pair of shoes online. Chances are you buy four pairs and return three. So, yes, e-commerce will supplant some of the business because some commodities are just more convenient to go online for. If I need a light bulb, it’s easier for me to order from Amazon and get it tomorrow. Things like same-day delivery will mean some types of business or segments of businesses are not sustainable to maintain a brick-and-mortar location.
But in-person retail is not gone. It certainly had a hiccup because people were not comfortable being together in close proximity and stores faced public health regulations. But as we become more comfortable being around one another, the experiential environments for dining or shopping will increase in demand because people enjoy that. That’s part of life, and people want to be out of the house and see other people. It’s like when I’ve gone back to work events recently — the first reaction everyone has is, “Wow! It’s so great to be together, right?” To have a conversation you wouldn’t have if it was over Zoom or over the phone. So, I think experiential retail will still occupy a portion of retail space. Memories are relatively short, and we will get past the pandemic at some point. Like the changes in our lives after 9/11, where some of them were permanent and others waned and people moved on, I think we’ll see the same impact when it comes to COVID-19.
CIRE: As far as technology goes, what opportunities are available to the retail sector?
Spiegel: For those businesses that had a digital strategy before the pandemic or implemented one during it, they will establish habits that are going to be here to stay. It’s convenient to order things on your phone and pick them up in 20 minutes or whenever it may be. If a retailer didn’t have a digital-first strategy, you certainly need one for both marketing your goods or services and procuring them. It’s just part of being a retailer today. Retail is not simply an in-person experience like it might have been years ago — you want people to see goods in advance. Maybe they want a preview and get a sense of your business through platforms like Instagram. These types of changes are here to stay. It’s not always a matter of going to the store and checking things out. Customers could be looking at your business online and that could be a way to drive demand for in-person retail experiences.
To some extent, we have adopted more technology since COVID-19. Anyone who’s in an office has been on Zoom and Teams over the past 18 months knows this. It’s been a great convenience. At the same time, like I said earlier, these platforms don’t negate the benefit and engagement of in-person experiences. This technology will continue to be a part of our lives, but at the same time, it’s not going to mean that face-to-face experiences are gone forever. There are things we prefer to do in person. Standing around waiting in line isn’t one of them, but if there’s something like ordering in advance so an item can just be picked up, that’s convenient for both the retailer and the consumer.
Editor's note: This article is an adapted excerpt from a full-length Commercial Investment Real Estate
podcast. Visit www.cirepodcast.com to listen to the full episode or stream wherever you listen to your favorite podcasts.