The retail apocalypse, or the slow decline in retail profitability and demand, has been happening for years. The coronavirus pandemic accelerated the rate of decline, resulting in more retailers closing their doors or filing bankruptcy in the past eight months than during all of 2010 that followed the Great Recession. Investors worrying that retail is dying definitely have cause for concern, but there could be hope on the horizon thanks to industrial real estate and adaptive reuse.
The outlook for retail isn't positive
While CBRE Group expects e-commerce to slow in 2021, returning to a more balanced level of growth as more brick-and-mortar stores reopen, there will still be a large number of vacant retail spaces across the nation with not enough retailers to fill the void. JLL reported Q3 2020 net absorption for retail fell 19.2 million square feet, and CBRE expects a 20% reduction in all retail space by 2025.
Brick-and-mortar retail space still has a place in the commercial market, but certain retail spaces, like malls, appear disproportionately affected. Retail investors, including retail real estate investment trusts (REITs), need to find creative long-term solutions to minimize losses and occupy unwanted space.
Creating new uses for empty retail space
Adaptive reuse is the practice of redeveloping an existing property for a new, higher, and better use. This practice will play a critical role in providing relief to retail property owners left with a surplus of empty retail space. The CBRE Group reported in July of 2020 there were currently 59 adaptive-reuse projects completed, planned, or underway that will ultimately convert 13.8 million square feet of empty retail space into 15.5 million square feet of industrial space, mostly warehouses. Determining the highest and best use of the land or unwanted retail space will differ by market, and for many will be industrial, but healthcare and wellness facilities, pet services, well-established franchises, automotive showrooms, service centers, hotels, office, senior housing, and multifamily could be alternative uses as well.
E-commerce has undoubtedly played a large role in the slowing of brick-and-mortar retail sales and profitability. Data centers, warehouses, logistics, and distribution centers are growing rapidly to meet consumer demand and the shift to online sales and are definitely the largest adaptive-reuse sector for retail space. Technological advances bring changes to our daily lives and economic needs. Industrial real estate, in addition to other essential commercial real estate, will likely be what saves retail investors in the future.