Why Retail could be a bright spot of 2023

December 2, 2022 3 Minute Listen

Lack of new supply will aid retail sector fundamentals

The rebound in brick-and-mortar retail sales this past year is expected to continue in 2023. Although high inflation, rising interest rates and labor shortages will remain headwinds, high construction costs and tight availability ensure that retail fundamentals will remain stable.

Figure 11: Neighborhood, Community & Strip-Center Availability Forecast

Source: CBRE Econometric Advisors, Q3 2022.

Lagging consumer confidence will weigh on retailers

Retailers will attempt to counter lagging consumer confidence next year by enhancing the customer experience. Sixty percent of respondents to a recent CBRE global consumer survey said they prefer an in-store experience. Retailers will adopt more technology to make the store experience more convenient, such as “walk-out purchasing” that eliminates the need to scan purchases and automatically charges customers for items they leave the store with. Retailers will also curate product offerings that meet the personal ESG goals of environmentally and socially conscious consumers. More than 75% of shoppers responding to CBRE’s survey said they plan to purchase environmentally friendly products next year, even at higher prices.

Retailers turning to technology as labor challenges continue

Retailers will continue to grapple with finding enough workers to staff their stores. While the retail workforce is stabilizing after all-time highs in both quits and job openings in late 2021 and early 2022, it has come at a cost: Retail wages rose 6.0% in 2020 and 4.9% in 2021, outpacing overall wage growth by 110 bps and 70 bps, respectively. As of Q3 2022, wages were still climbing, up 4.6% year-over-year, according to the U.S. Bureau of Labor Statistics. Despite better pay, retail workers appear unsatisfied. An August 2022 survey by McKinsey found that 49% of retail workers are considering leaving their jobs in the next three to six months, which may leave retailers short-staffed as 2023 begins.

Some retail sectors are addressing this with technology. For example, some restaurants are using robots for simple tasks in the kitchen, freeing up staff for more complex tasks. These robots can be leased for a lower monthly cost than the average employee. Other retailers are using robots for inventory scanning and cleaning. Implications for staffing and salaries will be a focus for 2023.

Mobile commerce to expand

Retail sales transacted through mobile devices, also known as m-commerce, are expected to account for 47% of all e-commerce sales in 2023, rising to 58% by 2027. According to Forrester, “digitally influenced” retail sales, where consumers research products online but buy or pick up in stores, will represent 62% of total retail sales in 2023 and 70% by 2027. This trend will help retailers connect with consumers in person and alleviate some supply chain issues. Overall, click-and-collect sales are forecast to reach $120 billion in 2023, representing almost 11% of all e-commerce.

Figure 12: Digitally influenced vs. non-influenced retail sales

Source: Forrester.

Lack of new supply to buoy retail sector in 2023

The retail real estate market’s solid fundamentals—positive net absorption, rising rents, lower vacancies—are largely driven by the lack of new supply. Retail deliveries have reached record lows over the past three years, a trend that likely will continue in 2023. In addition, more than 50 million sq. ft. of retail space has been removed from the market since 2003, including 10 million sq. ft. within the past five years. This should continue in 2023, as owners of struggling malls and centers convert their properties to mixed-use developments.

Retail sales per sq. ft., which rose sharply over the past five years, are expected to slow in 2023 before rising again the following year. Net absorption also is expected to slow, although not from less demand. Continued supply side constraints will suppress expansions by retail occupiers, who prefer to wait for prime space rather than invest in lesser trade areas, especially as development costs remain inflated. Retail real estate fundamentals should remain resilient despite economic challenges next year.

Figure 13: Retail Sales per SF & Retail Space per Capita 

Sources: CoStar, St. Louis FRED, CBRE Research, Q3 2022.

Trends to Watch

More Redevelopment Projects

With new construction remaining cost-prohibitive, retail developers and investors will focus on redesigning and redeveloping existing space to attract more shoppers. This will be especially true in prime trade areas, which are experiencing record-high occupancy levels and asking rents due to strong demand. Some of this redevelopment activity will involve conversions to other uses, such as office, industrial and residential.

Rise of Grocery Stores

The role of grocery stores will continue to evolve. Although food & beverage digital sales are rapidly growing, most of these orders are fulfilled at the store level through curbside pickup or third-party delivery. Grocers will transform their footprints to better suit multi-channel retailing.

Opportunities in Select Markets

Retailers will become more active in tertiary markets that have recently seen an outsized level of net migration, allowing them to build brand awareness at lower operating costs.

Lack of new supply will aid retail sector fundamentals

The rebound in brick-and-mortar retail sales this past year is expected to continue in 2023. Although high inflation, rising interest rates and labor shortages will remain headwinds, high construction costs and tight availability ensure that retail fundamentals will remain stable.

Figure 11: Neighborhood, Community & Strip-Center Availability Forecast

Source: CBRE Econometric Advisors, Q3 2022.

Lagging consumer confidence will weigh on retailers

Retailers will attempt to counter lagging consumer confidence next year by enhancing the customer experience. Sixty percent of respondents to a recent CBRE global consumer survey said they prefer an in-store experience. Retailers will adopt more technology to make the store experience more convenient, such as “walk-out purchasing” that eliminates the need to scan purchases and automatically charges customers for items they leave the store with. Retailers will also curate product offerings that meet the personal ESG goals of environmentally and socially conscious consumers. More than 75% of shoppers responding to CBRE’s survey said they plan to purchase environmentally friendly products next year, even at higher prices.

Retailers turning to technology as labor challenges continue

Retailers will continue to grapple with finding enough workers to staff their stores. While the retail workforce is stabilizing after all-time highs in both quits and job openings in late 2021 and early 2022, it has come at a cost: Retail wages rose 6.0% in 2020 and 4.9% in 2021, outpacing overall wage growth by 110 bps and 70 bps, respectively. As of Q3 2022, wages were still climbing, up 4.6% year-over-year, according to the U.S. Bureau of Labor Statistics. Despite better pay, retail workers appear unsatisfied. An August 2022 survey by McKinsey found that 49% of retail workers are considering leaving their jobs in the next three to six months, which may leave retailers short-staffed as 2023 begins.

Some retail sectors are addressing this with technology. For example, some restaurants are using robots for simple tasks in the kitchen, freeing up staff for more complex tasks. These robots can be leased for a lower monthly cost than the average employee. Other retailers are using robots for inventory scanning and cleaning. Implications for staffing and salaries will be a focus for 2023.

Mobile commerce to expand

Retail sales transacted through mobile devices, also known as m-commerce, are expected to account for 47% of all e-commerce sales in 2023, rising to 58% by 2027. According to Forrester, “digitally influenced” retail sales, where consumers research products online but buy or pick up in stores, will represent 62% of total retail sales in 2023 and 70% by 2027. This trend will help retailers connect with consumers in person and alleviate some supply chain issues. Overall, click-and-collect sales are forecast to reach $120 billion in 2023, representing almost 11% of all e-commerce.

Figure 12: Digitally influenced vs. non-influenced retail sales

Source: Forrester.

Lack of new supply to buoy retail sector in 2023

The retail real estate market’s solid fundamentals—positive net absorption, rising rents, lower vacancies—are largely driven by the lack of new supply. Retail deliveries have reached record lows over the past three years, a trend that likely will continue in 2023. In addition, more than 50 million sq. ft. of retail space has been removed from the market since 2003, including 10 million sq. ft. within the past five years. This should continue in 2023, as owners of struggling malls and centers convert their properties to mixed-use developments.

Retail sales per sq. ft., which rose sharply over the past five years, are expected to slow in 2023 before rising again the following year. Net absorption also is expected to slow, although not from less demand. Continued supply side constraints will suppress expansions by retail occupiers, who prefer to wait for prime space rather than invest in lesser trade areas, especially as development costs remain inflated. Retail real estate fundamentals should remain resilient despite economic challenges next year.

Figure 13: Retail Sales per SF & Retail Space per Capita 

Sources: CoStar, St. Louis FRED, CBRE Research, Q3 2022.

Trends to Watch

More Redevelopment Projects

With new construction remaining cost-prohibitive, retail developers and investors will focus on redesigning and redeveloping existing space to attract more shoppers. This will be especially true in prime trade areas, which are experiencing record-high occupancy levels and asking rents due to strong demand. Some of this redevelopment activity will involve conversions to other uses, such as office, industrial and residential.

Rise of Grocery Stores

The role of grocery stores will continue to evolve. Although food & beverage digital sales are rapidly growing, most of these orders are fulfilled at the store level through curbside pickup or third-party delivery. Grocers will transform their footprints to better suit multi-channel retailing.

Opportunities in Select Markets

Retailers will become more active in tertiary markets that have recently seen an outsized level of net migration, allowing them to build brand awareness at lower operating costs.

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