Retail apocalypse? Is retail dead? No, quite the contrary: Retail is alive and well. In spite of the increased spread of the omicron variant in the closing weeks of 2021, retail property fundamentals continued to improve. In Q4 2021, retail net absorption was close to the year's high (recorded in Q3 2021) as vacancy decreased to a pre-pandemic low and asking rents for retail space increased.
A sense of more normalcy occurred in 2021, with the easing of government mandates and increasing vaccinations. By the close of 2021, according to the CDC, more than 61 million people in the U.S. had received an additional/booster shot in addition to the 206 million people who were fully vaccinated. The increased rate of vaccination coupled with the continued strength in retail as consumer demand for goods and services surged resulted in record retail sales. Supported by increasing wages from a tight labor market and significant savings, thanks in part to earlier stimulus and the extension of unemployment benefits, holiday sales from the elongated holiday season, October through December, rose 17.1% year-over-year—the fastest pace ever recorded and significantly exceeded 2020's historic holiday shopping season. This is a year-over-year increase above the same period in 2019.
While e-commerce sales, with respect to total retail sales, rose considerably in 2020, there has been a noticeable decline of this share in 2021; physical stores are still a necessity for retailers. The retail sector has prevailed through significant headwinds that saw a large number of retailers file bankruptcy and permanently shutter brick-and-mortar locations. Some retail property types failed to survive the pandemic while others such as big-box stores were able to pivot and thrive amid changing consumer preferences, and now retail is healthier, and tenants are opening stores.
Store openings surpassed store closures in 2021 after 2020 saw the opening of 3,304 stores while also losing more than 8,736 stores. At the close of 2021, according to Coresight Research, there were 5,083 store openings announced by major retailers and 5,079 closures.
Increased demand for retail space
Demand for retail space continued positive trends in Q4 2021. Retail net absorption reached its highest level since Q3 2017 in Q3 2021 (29.2 million square foot or msf) and in Q4 2021, net absorption was not that far off as absorption totaled 28.1 msf. Absorption amongst the major retail categories: general retail at 13.4 msf, malls at 267,000 sf, neighborhood centers at 9.1 msf, power centers at 2.3 msf and strip malls at 2.7 msf. According to CoStar data, the metros that saw the largest volume of positive absorption were Houston (1.7 msf), Dallas-Fort Worth (1.6 msf), Atlanta (1.4 msf), Chicago (1.2 msf) and Detroit (1.1 msf).
Retail leasing activity continued to slide in Q4 2021 as it declined from a peak of 56.1 msf in Q2 to 43.1 msf. The total record in Q4 2021 remains elevated above the pandemic-low in Q2 2020 (34.8 msf). Strip centers and power centers both decreased by approximately 20% in leasing volume from Q3 2021 to Q4 2021, while general retail declined 18%. Conversely, neighborhood centers and malls were less impacted at a 13.3% and 8.9% decline respectively in leasing volume over the same period.
Vacancy continued to decline throughout 2021 before reaching the low of the year in Q4 2021 at 4.6% which is down from Q3 2021's 4.8%. The Q4 2021 vacancy rate is the lowest since Q4 2019. Take notice of retail vacancy as deliveries increased by 3.8 msf above Q3 2021 and with 49.7 msf under construction in Q4 2021. As of January 20, 2022, net deliveries already total 17.7 msf, the highest since Q4 2017. Vacancies declined in all categories except malls which remain unchanged from Q3 2021 (8.3%). Vacancies declined in neighborhood centers, power centers, strip centers and general retail to 7.1%, 5.3%, 5.2% and 2.8% respectively. The lowest retail vacancy rates by metro were as follows: Wenatchee (0.6%), Billings (0.9%), Cedar Rapids (1.0%), Bellingham (1.1%) and Pittsfield (1.2%).
As retail vacancy continues to decline, rents are getting pushed upwards to $22.57 for 3.0% annual growth from Q4 2020 to Q4 2021. The highest asking rent growth was seen in the West and Midwest states. Top markets by retail rent growth were led by Las Vegas (10%), Tulsa (9.5%), Nashville (8.7%), Akron (8.2%) and Salt Lake City (8.0%).
Pandemic-induced consumer spending habits should persist in 2022
In the face of increasing COVID-19 cases as a result of omicron, retail is still in good position to continue its recovery as we progress throughout 2022. Omicron, inflation, and supply chain issues are the biggest potential threat to a continued recovery, although supply chain disruptions should ease as 2022 moves forward. Retail sales posted a good Q4 and strong numbers annually despite the setback in December sales with a decline in manufacturing and an elongated holiday season. Retail real estate experienced good fundamentals at the national level with continued positive net absorption, increasing rents, and continued declining vacancy. Consumers have showed their willingness to return to stores as evidenced by retail sales. However, omicron will continue to have a near-term effect on retail.
Omicron will presumably reinforce some of the consumer habits exacerbated by the pandemic—strong demand for goods, weaker demand for services, and supply challenges which will accentuate inflation in the short term. However, despite concerns for inflation, consumers occasionally say one thing and do another. Regardless, as more people become vaccinated and fully-vaccinated and as cases decline, consumers will have accumulated more spending power as a result of increasing income and prosperity coupled with excess savings.
Although e-commerce's share to total retail sales can be viewed as leveling-out in 2021, e-commerce's share of total retail sales in 2022 should increase with stores calculating their elevated 2021 recovery and determining the path forward. As a result of the pandemic, e-commerce will continue to capture a large portion of retail sales but the difference between brick-and-mortar and pure e-commerce will become more obscure as brick-and-mortar locations make convenience a priority, such as in-store pickup of online orders, lower prices, and experienced-based shopping. In turn, this will provide the consumer with more flexibility.