Due in no small part to the ravages of the global COVID-19 crisis, retail real estate could be argued to have suffered significantly greater disruption than any other area of commercial real estate.

Retail properties which were vacant at the onset of the pandemic struggled to find occupants, whilst many national retailers found they had too many locations to sustain during this time and were forced close some stores as a result. Low foot traffic and sky-high rent and business rates also conspired to keep many high street stores vacant before, during, and after COVID-19.

And, while many expected ecommerce to continue as the dominant force in retail after the worst days of the pandemic had passed, the opposite actually turned out to be true. There has been a resurgence of customers seeking out physical shopping experiences post-pandemic and many retail brands have found foot traffic returning to the levels experienced in 2019 and before.

A Real Estate Resurgence

The upshot of this trend is that the retail real estate market is now staging an impressive comeback following these dark days. According to The Wall Street Journal, US retail vacancy fell to 6.1% in the second quarter of 2022 – the lowest level in at least 15 years, as more stores opened than closed last year for the first time since 1995.

The only exception to this pattern is office space occupancy, which is failing to recover from the pandemic due to the continuing pattern of people working from home. However, according to the National Association of Realtors, demand for retail properties has stayed positive for seven quarters in spite of the economic downturn being experienced in the US right now.

Franchises

In an environment where demand for retail locations is growing and the number of available properties falling, we are seeing many entrepreneurs taking advantage of the opportunities franchising offers.

"As demand for retail real estate grows, investing in a franchise that includes real estate becomes more lucrative,” reports Entrepreneur. "You’re not only opening a business concept that will likely generate income, but you're also investing in a piece of property that will create a flexible exit strategy. This is true for both franchisees purchasing land and building from the ground up as well as those purchasing pre-existing space that can be renovated for their specific use.”

Not only can franchisees enjoy the benefits of trading under a recognized brand name, but they can also gain invaluable assistance in acquiring property in which to run their business thanks to the increased influence and buying power of a larger company. Expect to see more retailers switch to a franchise model to meet the challenges of a more competitive retail real estate market.

Green Real Estate Development

As those who read our previous piece on the increasing relevance of ESG in the retail space, investors and customers are placing growing pressure on brands to make their operation more sustainable and adopt an inclusive culture which more closely reflects their own.

This will also be reflected in the development of retail real estate, and we are going to see developers increasingly turn to greener options when it comes to future projects. With ever more proprietors and other property investors understanding that sustainability is good for business, not being seen to act can have severe consequences for the value of stock.

"Many institutional retail landlords now acknowledge that sustainable assets are better performing assets,” reports Savills. "While we may begin to see evidence of a green premium over the coming years, it is the notion of brown discounting that may have a bigger impact on the sector and is anticipated for those with the weakest occupational demand and poorest environmental standards.”

For example, research has shown that a 20% reduction in energy consumption can lead to a 5% increase in revenue. This demonstrates that there is a clear financial incentive for retailers to invest in sustainable real estate and support these projects moving forwards.

"The future for good retail investment and development is in recognizing that economic and environmental sustainability are not two disparate goals, but two sides of the same coin,” continues Savills. "Those places that embrace both objectives will in turn be embraced by communities and consumers. Occupational demand will follow, which must therefore be beneficial to owners and stakeholders too.”

Final Thoughts

ESG concerns, franchising, and the strengthening retail real estate market are all factors which need to be considered when developing strategy for 2023 and beyond. As the recovery from the pandemic continues, retail needs to have the real estate resources to meet increasing demand from customers.

The state of the retail real estate market is sure to be a hot button issue at Future Stores Seattle 2023, being held in June at The Sheraton Seattle.

Download the agenda today for more information and insights.