A Lack Of New Builds Is Squeezing A Hot Retail Resurgence

Much has been written this year about the plight of commercial real estate (CRE), but making that analysis by grouping office, retail, industrial and multifamily isn't telling the whole story. The comeback story of one of those sectors is worth discussing separately. 

One CRE trend you can report by grouping the different sectors is that building starts have stalled. Nick Gerli, CEO of Reventure Consulting, recently tweeted, "The commercial real estate crash is happening. Values for office, retail and apartment buildings are already down -11%. Morgan Stanley thinks values could crash -40% when all is said and done. Big problem for U.S. economy." 

A new report from CoStar Group focused on retail said that even though just over 62 million square feet of retail space was under construction at the end of June, the total amount being built remains near its lowest levels of the past decade. 

As headlines shout "Retail is Dead" while focusing on the demise of the indoor mall, there is another story that is not being told, something CoStar National Director of U.S. Retail Analytics Brandon Svec had no problem sharing with Benzinga.  He believes that the gloomy focus on reporting a lack of new starts and the demise of malls is missing a bigger story — retail space is a scorching commodity right now.  

"On the whole, we are in a place where there's nothing to disrupt this fundamental balance of space and how tight retail space availability is right now. When you think about the balance of supply and demand and how targeted retail markets are, what we have is a large list of retailers looking to expand with no new supply of space coming," he said. "We lost 25 million square feet of demand in 2020 and to get back to where we were before the pandemic, we now need to add 2½ times those losses."

While much was assumed during the pandemic, precisely that consumers had permanently adjusted to ordering online, brick-and-mortar has rebounded in a big way, almost catching CRE investors by surprise and causing some of the bidding wars that have occurred for what available retail space exists. 

"There is great demand for retail anchor space with nothing coming down the pike. It's going to be tight for the foreseeable future," Svec said.   

But like CRE on the whole, Svec believes the analytics of the retail sector sometimes also gets a broad stroke and misses the fine print of the recovery. 

"Retail got lumped into one bucket for some time, and when everyone was focusing on malls closing, they missed the bigger story of the growth of fitness and restaurant occupancy," Svec said. "Combined with the strong consumer spending we're continuing to see, that has put a lot of retail tenants in a fantastic position."  

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