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The Metros Where Retail CRE will be Hit the Hardest

Apr 22, 2020 by Jeffery Marino

Between forced store closures and record-breaking unemployment filings due to the scourge of COVID-19, the retail property market is without question at the greatest risk for short-term shock and a potential protracted recovery.

Key Takeaways

  • The forced closure of non-essential businesses amid the coronavirus pandemic means CRE investments in the retail property sector face the greatest risk of downside exposure.
  • With neither vacancy rates nor rent growth in 2019 reaching pre-recession levels, the retail sector was already on shaky ground before the pandemic hit.
  • Nationwide, retail industry and accommodation and food services workers account for about 20% of the total workforce, many of whom have been furloughed or laid off due to the coronavirus pandemic.
  • The share of service sector employment is higher than the national average in 12 metropolitan areas, topping out at 34% in Atlantic City, NJ and 31% in Myrtle Beach, SC, rendering retail sector CRE investment at much higher risk for declining cash flows and potential default in these areas.
  • Many metros with the highest share of retail employment, such as Myrtle Beach, SC and Flint, MI also had the highest retail sector vacancy rates in 2019.

Even before the pandemic hit, the CRE retail sector was showing worrisome signs of a secular slowdown. While the sector recovered along with the rest of the economy after bottoming-out in 2011/2012, completions, net absorption, and asking rent growth have consistently slowed since 2017, thanks mostly to the rising dominance of ecommerce.

The 10.2% vacancy rate in 2019 changed very little since it topped out at 11% in 2010 and is nowhere near its pre-recession low of 6.4%, according to data from Moody’s Analytics REIS. Prior to the pandemic, many market projections encouraged cautious optimism for the retail sector in 2020 and beyond. However, in light of the game-changer that is COVID-19, Moody’s is now forecasting a 2020 vacancy rate of 13.5% attended by a 3.7% decline in asking rents, both of which make the events of 2008 look tame by comparison.

A vicious cycle is at the heart of the retail sector’s particular vulnerability to the pandemic: Retail investors and landlords risk a massive loss of rental income first from the immediate revenue losses from forced business closures, and second from the downstream effects of contracting consumer spending as furloughs and layoffs ripple through the economy.

Nationwide, retail workers account for about 10% of the total workforce and employees in accommodation and food services comprise about another 10%, according to Labor Department data. But the share of the workforce employed by non-essential businesses is much higher in specific metro areas, exposing retail property landlords and investors with holdings in these markets to even greater risk.

Small Metros With Greatest Share of Retail Employees Face Highest Risk

One might think that retail property investment in large metros would have the highest level of downside exposure due to the pandemic. After all, big cities like New York, Los Angeles, and Chicago are major hubs of tourism, entertainment, and shopping and employ millions of service sector workers.

While this may be true strictly from a square-footage perspective, it’s the smaller metros with a higher concentration of retail employment found along the Sun Belt that face the greatest exposure to pandemic-induced default.

2019 KPIs Show Retail on Shaky Ground in High Risk Markets

Nationwide, retail earned its reputation as a troubled sector in 2019. Save for a handful of bright spots with burgeoning mixed-use development, such as in Houston and, somewhat unexpectedly, Chicago, most of 2019’s KPIs at the metro level were already on a downward slope.

Unfortunately, many of the markets with the highest share of retail employment were also 2019’s underachievers. For instance, Myrtle Beach, SC and Flint, MI have the highest share of retail employees compared to nonfarm employment in the country, while at the same time ranking among the highest retail property vacancy rates in 2019.

Despite record-breaking economic growth in recent years, high vacancy rates and tepid absorption pushed asking rents down in many metros. Again, small metros in the South with a high concentration of retail employment, such as Cape Coral, FL, and McAllen, TX were already experiencing declining rents.

Retail Investment in Large Metro Areas Somewhat Insulated, For Now

Retail property investors and landlords in America’s major metros still have plenty of cause for concern, but certain structural elements of these markets may provide some degree of insulation to the pandemic.

By virtue of their sheer size, larger markets tend to be more diverse: These economies are much less dependent on the success of any one industry compared to their smaller neighbors.

Much of the retail square footage in large metros is also occupied by big box stores, which also have established ecommerce operations and, depending on the outlet of course, much greater access to capital reserves. This is perhaps why the CRE retail sector in markets like Houston and Chicago have better withstood the widespread secular decline we’ve seen throughout the industry over the past decade.

Policy Considerations and the Upshot for Investors

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes several safeguards for small businesses, including the Paycheck Protection Program, which is intended to stem the tide of widespread unemployment. While some tenants may use these funds for staying current on rent, they are not required to do so, and are in fact protected by eviction moratoriums extended to both residential and commercial tenants.

Commercial landlords may find some relief by working with their lender for a loan modification, but this is assuming that the property is leveraged and does not address the burden of other carrying costs not associated with the loan.

Of course, these stop-gap measures are designed to help business owners and, by extension, commercial real estate investors absorb the immediate shock generated by the pandemic. There is no telling what the long-term effects will be on CRE investment and the retail sector in particular. While the pandemic will touch everyone regardless of industry or asset class, investors who built highly diversified portfolios, especially geographically, will be thankful they did so.


Two primary datasets were used for this analysis: 2018 Employment Estimates by County, Metro and Other Areas from the Bureau of Economic Analysis (BEA), and the latest Real Estate Information Services (REIS) Retail Sector Report from Moody’s Analytics.

The BEA dataset is built using a combination of statistics from the U.S. Bureau of Labor Statistics (BLS) and the Internal Revenue Service (IRS) to show employment levels at the metropolitan statistical area (MSA) with a complete industry breakdown. We determined the share of employees working in each industry by dividing the industry employment in each metro area by total nonfarm employment. The primary aim of this analysis was to determine the share of workers attached to the commercial real estate retail sector, thus we focused on retail industry and accommodation and food services employment. We included several other major industries in the visualization for context, but this data was not used in our analysis.

Since naming conventions for CRE sectors and industries do not correlate perfectly, we summed employment in the retail industry and the accommodation and food services industry (Retail and Food Service Combined Industries) for the best approximation of the share of employees working in a metro area that are attached to a CRE retail property.

All key performance indicator data was taken from the latest REIS retail sector report, which is current through April 2020 and includes Moody’s Analytics annual market projections through 2029. The nationwide data displayed in this report includes annual averages for selected KPIs from 2000 to 2019 in addition to the Moody’s Protracted Slump Scenario through 2024. The coronavirus pandemic is included in the Moody’s projections. Moody’s does not publish a protracted slump scenario at the metro level.

Metro areas were limited for this analysis to those with a minimum population of 250,000 residents in 2018, according to the latest Census Bureau population estimates.

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