U.S. Real Estate Market Outlook 2022
Retail’s recovery stokes optimism and investment
The retail sector is recovering relatively well from the pandemic’s major disruptions. Existing retail space is more efficient, with sales per sq. ft. improving due to few new stores being built and rising retail sales. The mall sector, thought to be in deep peril, is experiencing foot traffic above pre-pandemic levels and reporting double-digit sales growth. Investors, meanwhile, are taking a fresh look at retail’s attractive yields compared with other asset classes. In addition, record levels of venture capital are targeting retail-focused companies.
Productivity of retail space and consumer spending rising
Since 2010, sales per sq. ft. of U.S. retail space have been on the rise. From 2010 to 2020, retail sales grew 42%, while retail supply grew just 4%. The pandemic forced a temporary pause in this trend, but year-to-date activity in 2021 shows that retailers are using space more efficiently than ever.
Consumer spending is forecast to rise in 2022, as a build-up of personal savings during the pandemic is released. The revival of inbound international travel, responsible for more than $150 billion in expenditures annually according to a 2019 U.S. Travel Association report, will provide an additional boost to retail in coastal and other tourism-focused markets.
Figure 8: Ratio of U.S. Retail Sales to Retail Sq. Ft.
Note: The index shows the change in sales per sq. ft. of retail space in the U.S., including all centers over 20,000 sq. ft.
Source: CoStar, U.S. Census Bureau, CBRE Research, Q3 2021.
Modest development pipeline aiding recovery
With developers focused on industrial and multifamily projects, the retail construction pipeline will remain modest heading into 2022. As supply chain issues impact building materials, including delayed deliveries and higher overall costs, retail development will remain constrained, allowing space productivity to improve even more.
Capital markets showing signs of life
Retail investment roared back in 2021. REITs increased acquisitions, which already reached their second-largest annual total over the past 10 years through Q3 2021. Grocery-anchored centers attracted $5 billion in investment activity in the U.S. in Q3 2021, the segment’s second-most active quarter over the last decade.
Grocery-anchored retail assets were resilient during the pandemic. This subsector adapted quite well to online innovations such as curbside pickup and third-party delivery services. With grocery-based e-commerce expected to grow more than 20% in 2022 and double by 2025, grocery-anchored centers will remain the gold standard of retail investment amid favorable supply-demand dynamics and attractive pricing on a risk-adjusted basis. And as debt liquidity for retail improves, the buyer pool will increase.
Other attractive assets for retail investors include those anchored by quick serve restaurants with drive-thrus, banks, drug stores and smaller, single-tenant freestanding retail sites. Recent trading volume for such assets has been higher than the long-term quarterly average. Quick-serve occupiers are designing new drive-thru formats, with multiple purpose-built lanes, such as dedicated mobile pick-up lanes. These new designs will maximize the efficiency of the site’s footprint while shrinking indoor dining areas.
The mall sector continues to surprise. Mall-owning REITs' Q3 2021 reports have been positive. Despite growing vacancy in lower-classed properties, foot traffic data from Placer.ai suggests an underestimated resilience within regional and super-regional malls. In July, indoor malls exhibited a year-over-two-year visit gap of just negative 0.1% for the month, with outdoor malls growing their total visits by 2.1%, suggesting a complete recovery in foot traffic.
Primary markets such as Atlanta, Boston, Houston, Phoenix and South Florida should outperform in 2022. Secondary markets like Jacksonville, Milwaukee, Orlando and Raleigh-Durham experienced heightened activity in 2021 and will carry that momentum into 2022.
With grocery-based e-commerce expected to grow by more than 20% in 2022 and double by 2025, grocery-anchored centers will remain the gold standard of retail investment.
Figure 9: Venture Capital Placed in U.S. Retail-Focused Companies
Source: U.S. Bureau of Labor Statistics, October 2021.
Venture capital entering the retail sector
2021 has been a record year for venture capital investment in companies supporting the retail trade. Technology that drives e-commerce—logistics and supply chain management, in particular—is especially attractive. Investment activity is also high for mobile payment applications. Also known as m-commerce, this conduit of retail trade has been growing as a segment of total retail, with an estimated $295 billion in U.S. retail sales in 2021 and up to $660 billion in annual sales by 2025 when it will account for over 10% of total retail sales, according to eMarketer. Venture capital is also seeking investments in location analytics, enterprise software, artificial intelligence and machine learning. Funding this growing technology could help ease the stress on the supply chain, which remains an issue as the nation emerges from the pandemic.
These investments will also help brick-and-mortar retail. Mobile apps that support click-and-collect transactions will drive foot traffic at retail locations. In addition, fintech ventures such as Affirm and Klarna are partnering with retailers to offer “buy now, pay later” services, which are rapidly rising in popularity among millennial and Gen Z shoppers.
Active 2022 on tap for retail sector
Foot traffic at retail centers will rise in 2022 as more pandemic restrictions are lifted. Occupiers are signing longer leases and investors are placing capital into retail assets, setting the stage for a busy 2022. The restoration of inbound international travel will also boost retail sales in gateway markets.
In most markets, open-air retail centers are seeing a boost in activity and will be the most sought-after asset class within the retail sector. Single-tenant drive-thru sites will also perform well and will fetch record-high prices in 2022.
Asking rents will appreciate the most in Sun Belt markets and Seattle. Overall rents within regional and super-regional malls will remain stagnant as struggling assets hope for redevelopment or repositioning, although Class A malls will outperform.
Trends to watch
- Partnerships between digital and traditional retail brands
Retailers are expanding their offerings, partnering with direct-to-consumer companies—often via branded kiosks or within department stores—that can add foot traffic for legacy stores and establish a physical presence for emerging retail brands.
- Stores as a solution to supply chain issues
For the final “50 feet,” which remains one of the most expensive legs of the logistics process, physical stores will take on a greater role in 2022. Stores will make it easier for consumers to return goods, offer refunds and expand return locations.
- Embracing ESG as an authentic aim of retailers
A growing share of consumers prefer ethically defensible brands, especially those focused on reducing carbon emissions and waste. Interest in the resale market is rising, as consumers feel the products are unique and a good value. Retailers could also take advantage by marketing their own secondhand products. Overall, Forrester estimates that 41% of U.S. consumers prefer to purchase environmentally sustainable goods.