Suburban Retail Outlook

Retail Real Estate, Pre and Post Pandemic

During the pandemic, mandated shutdowns changed the steady growth of vibrant retail across the US into what felt like the final chapter in a cliff hanger, leaving readers with mostly questions and not enough answers. Not only did the shutdowns put future commercial real estate deals at risk, but existing leases also came into question as tenants and operators were thrown into survival mode.

Property owners and value-focused property managers recognized in order to maintain value of the assets themselves, it became even more important to attract and retain quality tenants at market rents. Personal guarantees and additional legalese in leases became another level of protection for owners and investors from swift economic changes beyond their control.

Critical Moment for Retail

Businesses and property owners who learned to pivot towards survival managed to maintain revenue and take hold of a larger share of the market through their ingenuity. Flexible approaches to products, packaging, delivery and service became the lifeline that allowed retail tenants to stay profitable and allowed landlords to continue to receiving rent payments.

For landlords, communication and management became the key. For those owners with the benefit of property management, leaning heavily on those established relationships lead to strategies for helping businesses moving forward with as much support from ownership as was sustainable.

2022 vs 2023 Retail Spending

As shoppers adapted to their new covid-era reality, their shopping habits also began to change. During the pandemic, less access to leisure activities meant more expendable income. We saw increased spending on groceries, home improvement, craft supplies and luxury pet products. Now consumers are reigning in their freedom to spend as the rising cost of goods and the return to the office have now moved spending in a new direction.

Retail Shoppers Focus on Value

From Q3 2022 – Present, a 32% increase in grocery cost has eaten up the discretionary spending for many consumers. This means the shift to value grocers in February 2022 through today continues to compound and will increasingly put pressure on other types of retail. Persistent recession fears have caused an “hourglass consumption pattern” so that consumers have disengaged from higher-end retail to value buys and the desire to be seen as thrifty even if there is no need. Food prices are expected to grow more slowly in 2023 than in 2022 but still at above historical-average rates¹, and discounters are riding high. Traffic is up regarding the number of visits to grocers, but the spend-per-visit is down as consumers are shopping more frequently to cherry pick promotions and value buys. Luxury spenders have shifted their dollars to experiences and international travel versus goods.

Other Impacts to Retail Spending

Middle-market travel and experience is becoming more localized and ‘Out and About Activities and Nightlife’ traffic is also up strongly in 2023, which again takes away share from soft good retail spending. Return to the office is another driver cutting into goods consumption due to several changes:

Increased Transportation Costs – car/fuel/public transportation
Day/Dependent/Parent care
Dog Sitters/Walkers
Lunch/Food
Clothing

As a result, shoppers can no longer spend as much on categories like fancy pet food, home improvements, alcohol, or lounge wear.

Suburban Markets Gaining Popularity

Another directional pivot we’re seeing particularly in the Chicagoland region is a move away from urban city centers towards the suburbs. Migration and suburbanization trends observed since the pandemic are closely tied to housing, as households seek inventory and affordability and, perhaps, have new priorities since the pandemic.²As a result, suburban commercial real estate markets are much tighter than downtown real estate, and the gap continues to widen.

Millennials are squarely in the family formation life stage (ages 27-42), and that means a stronger pull towards the suburbs for this population of avid consumers. The housing affordability index has fallen, and the Midwest is benefiting from the skyrocketing cost of living on the coasts. Millions of people moved during the pandemic, driven by the opportunity to work remotely, the desire for more space, and better affordability.³ 60% of the net population migration of 2019 – 2022 went to tertiary markets, which have benefited, but there are signs of shifts as people have to go back to offices.

Retail Remains Strong in Chicago Market

Lack of supply in the Midwest is continuing to drive demand. The Midwest has seen more than 1.5x absorption than what has been delivered. The spread between prime and subprime markets is widening, making appraisals especially critical when building a case for lending in subprime markets. The appraised value of commercial properties is based on the quality of the asset. The property’s business use and revenue are not part of the consideration for appraised value, therefore, the management of the property and how well it’s been maintained remain two important factors in retaining long-term property value.

Chicago led all us markets in retail consumption in 2023. Chicago is also in the top 10 of US markets for year over year restaurant sales increase (up more than 9% YOY 2023 vs 2022). According to World Business Chicago, Chicago has the versatility to adapt to a changing world… as the #1 destination for engineering, business, and tech graduates across the Midwest…⁴

Commercial real estate brokers, appraisers and property managers often become the lifeline between market changes and property owners. A trusted advisor consistently educates their clients on the evolving retail dynamics. While general news and media can sway property owners to believe whatever narrative suits the headlines, trusted advisors can seek to provide the most valuable thing of all, perspective.

Works cited:

Suburban Retail Outlook

November 10, 2023