Written By: Eric Zimmermann - Chief Acquisitions Officer, Big V Property Group
The sold-out ICSC Open-Air Conference (“OAC”) provided great networking and, even better, actionable information on the state of the industry. OAC attracts top leaders in the retail real estate sector. The general consensus is that it’s a great time for the retail industry’s fundamentals.
The economy remains surprisingly resilient coming out of the pandemic, according to keynote speaker Ryan Severino, CFA, Managing Director, Chief Economist, and Head of U.S. Research at BGO. Though it’s happening in fits and starts, inflation is cooling off and he anticipated it will stabilize at about 2% - The Fed’s target. Thus far, the economy seems to be adapting to higher interest rates (though look for rate cuts by the Fed in the second half of this year), and a persistent labor shortage. So, it’s not surprising that goods spending is continuing.
Over the last five years, retail sales are up 89%, while the U.S. GDP is up 33%. It’s a terrific time for retail, based on supply and demand, according to our team’s conversations at the meeting. At 93%, occupancy is at an all-time high for most owners. That is due to a combination of very restrained new construction (GLA up just 6.8% over the last five years), continued robust expansion by retailers and smart demolition of some 200 million square feet of obsolete space in the last five years.
Most of the weak retail performers that had dragged down properties earlier in the decade have since restructured or closed. Stronger tenants have taken advantage of these opportunities, and 2023 announced store openings were 45% higher than closings. Landlords and property managers are actually excited about the possibilities of vacancies, because those spaces can be filled with stronger tenants at better rates. In most markets, we’re seeing retailers competing for available spaces – particularly anchor spaces
Penciling out a project or a new tenant remains challenging, as the costs of capital and construction remain painfully high. On the transaction front, which slowed dramatically as interest rates rose last year, optimism suggests that volume should pick up 10% to 20% this year. We may even see some portfolio transactions, if tight CRE debt markets become more liquid.
While challenges remain due to the uncertainniss of geopolitical events and the looming Presidential election, there are many more reasons to be optimistic than pessimistic about the long-term prospects for retail landlords. Shoppers are smarter, retailers are on better financial footing, our spaces more valuable to tenants due to last-mile distribution use, and new product construction is at an all-time-low; and is predicted to remain so. All in all, OAC was extremely encouraging.
About Eric Zimmermann
Eric Zimmermann joined Big V Property Group in 2023 as an advisor to the Executive Committee and stepped into the role of Chief Acquisitions Officer later that same year. Eric's principal mission will be to steer the company's acquisitions strategy, leveraging his vast knowledge in retail acquisitions, capital markets, and equity investment. Read Eric's Full Bio