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The Retail Market Finished 2019 Strong. What Does 2020 Have In Store?

2019 was an exhilarating year in commercial real estate. Low interest rates, major tenants declaring bankruptcy, record-high rental rates, and economic uncertainty provoked an array of emotions from investors as we approached the 10-year mark of a continuous growth cycle. By mid-year 2019, the healthy unemployment rate and thriving economy created generous returns for shopping center owners. Low interest rates and a strong economy paved the way for record-high rental rates throughout Florida giving many of our clients the ability to increase their cash flow by 5% or more. New concepts made their way into the market, pushing out one-time retail giants, such as Rue 21, Sports Authority and other top brands. The vacancies of these big-box retail titans gave landlords an opportunity to re-position their centers for long-term success through service-based tenants providing co-work, restaurant, and health and wellness occupants.

Graph Courtesy of CoStar.

The unemployment rate fell to 3.5% in February, a 50-year record low. Most low and middle-income households experienced very slow wage growth over this last economic cycle, but retailers remained strong despite the threat of middle-class households reducing spending.

Shopping center rents increased across Tampa Bay. On average, rents increased 5.7% and vacancy rates decreased from 6.4% to 6.0% by September 2019. Tampa, Hillsborough, and Pinellas submarkets experienced rent increases by more than $3 per square foot.

Vacancies of big-box retail occupants could not stop the success of the retail sector in 2019. Service-based, Grocer-anchored, and multi- purpose centers continued to produce low cap rates and positive cash flow for owners.

2020 Retail Market Outlook:

As we step into the third decade of the 21st century, it is possible that economic growth may slow. The slowing of global growth accompanied by on-going trade tensions and an upcoming presidential election will certainly influence fiscal stimulus.

Grocery-Anchored shopping centers still reign in retail. Centers with large US Grocer tenants such as Whole Foods, Trader Joe’s, Publix, and Safeway are continually maintaining low cap rates, producing steady and increasing returns. High-performing grocery-anchored centers have been a staple in every real estate cycle. They have the ability to consistently generate cash flow growth while withstanding an economic downturn. While larger grocers have proved themselves resilient, grocery and department stores are projected to undergo changes in the next few years. Their new business models will be based around convenience and efficiency. We have already begun to see this strategic plan unfold. Large chains such as Whole Foods and Walmart are attempting to capitalize by opening mega-stores in larger populated areas, and smaller stores, offering lower prices and convenience in order to appeal to their customers based on the area’s different geographic and demographic criteria.

Malls and over-sized retail centers are beginning to struggle. So, to remain relevant, large-scale retailers must be more than just a distribution center of goods. Although, because retail-only may no longer be the best use for these properties, it does not mean they are dead in the water just yet. These coveted locations are well-positioned to transform into mixed-use town centers. Integrating co-living, co-working, and entertainment concepts. Health and wellness-based tenants have helped combat the volatility of former tenants in these mixed-use projects. Places like gyms, and yoga and massage studios, have been able to create a loyal customer base to these centers through the health and fitness community.

Generational and demographic factors are also pivoting the drivers of retail’s outlook. We have looked at how different ages, generations, and the differing cultures between them will affect the future of shopping centers. The influx of well-educated, young-adult millennials to major cities has provided a strong rise to the retail sector. Millennials are for the most part price-conscious shoppers, yet, they also place a high value on experiences and don’t mind paying for them. One of those experiences is eating out. Mixed-use shopping centers with both restaurant and apparel-based tenants have been reaping the most benefits from millennial’s shopping habits over the past few years. Although, the focus is beginning to shift away from “Baby Boomers”, “Gen-X”, and “Millennials”. “Gen-Z” is now a large force in the economy. This generation born between 1997-2010 has the capability of being a massive economic power. Although, the question remains…Will these now young adults return to the brick and mortar shopping centers and malls that they so greatly occupied as teenagers? With respect to the “Amazon Effect” that has spread amongst the globe, Gen-Z still seems to have a nostalgic and emotional attachment to the consumer experience concept rooted in their teenage years. Immersing into the in-person shopping experience provides a brief hiatus from the constant digital engagement our generations are now bound to.

Success in 2020 may be defined by a retailer's ability to offer an emotional and memorable experience. Regardless of what customers are looking for, anything can now be purchased online, so snagging consumer attention and hands-on interaction is imperative for creating an experience. A new study from PricewaterhouseCoopers is showing how retailers are also benefiting from digital technology. By using this technology retailers are able to create a better customer experience but also battle the online shopping “Amazon-type” powerhouses. According to the study by PwC, they predict by 2020, brands and retailers will be experts in customer data mining to better understand purchasing behavior and trends. We are also beginning to see experimentation with augmented or virtual reality that is allowing customers to “try on” products before coming into physical stores to then bring the customer experience full circle.

2020 will be a landmark year for how the retail industry will change, its future challenges, and the restructure of decade-old practices to successfully integrate new property concepts and promote continual growth.

Now, more than ever, Retail Owners are working with us in taking a proactive approach to understand how their centers are performing in the unique market we are in now.

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