Retail Rents Expected To Drop 5.5% From Pandemic

Retail rents are likely to decline by 5.5% in 2020, as discretionary retailers like apparel stores, specialty shops as well as dining establishments have been pummeled by the COVID-19 pandemic, according to a new report from JLL.

The company’s analysis pointed to a clear bifurcation in the retail market, where essential retailers, led by grocery stores, thrived in the first part of 2020, while non-essential retailers saw plunging sales thanks to mandatory closure orders.

As a consequence, JLL’s “moderate” forecast anticipates that rents will drop more than one point below the 4.4% decline that marked the nadir of rents in the Great Recession.

If consumer confidence and retail sales rebound faster than anticipated, the company projects a 2.1% dip, while a more severe disruption would lead to a 7.1% drop. But JLL is optimistic that retail rents will recover and become positive by 2022.

Vacancies have also increased across the retail sector, but because the COVID-fueled shutdown took place near the end of the first quarter of 2020, the full effects of the pandemic on retail real estate fundamentals are uncertain. Total net absorption, a measure of the change in occupied space, was negative for the first quarter at -6.4 million square feet. That marks a 213.5% decline year over year.

General retail, which consists of single-tenant freestanding commercial buildings like drugstores and some grocery stores, was the only category in which net absorption increased in the first quarter. Meanwhile, the rate plunged for malls by 3.7 million square feet, or 500%, alongside temporary closures that began in March. Year-over-year department store sales fell 23.9% in March and 47.0% in April, while apparel stores fell 50.7% and 89.3% for the same periods, respectively.

Power centers, those shopping centers anchored by big-box tenants and discount supercenters, saw a lesser decline in net absorption, which dipped by 1.6 million square feet, or 267%. They were aided by home-related retails including home improvement stores and pet stores, which were allowed to stay open during the pandemic. Interestingly, sales of sporting goods and toys spiked, both online and in person, in mid March, coinciding with the pending implementation of shutdown orders.

The record out of traditional shopping centers, anchored by grocery stores and dollar stores, was mixed, with anchor tenants thriving and smaller tenants suffering. As a whole, net absorption fell by 5.8 million square feet, or 245.6% in the first quarter.

And while grocery stores were the beneficiaries of surging demand in March as consumers began to stockpile in anticipation of the crisis, there was a split between high-priced boutique stores and the rest of the market. Whole Foods saw visits drop by 17% compared to the previous March, while the decline at Trader Joe’s was 10.4%. Smart & Final, Albertsons and Dollar General were the biggest winners, with Smart & Final, a warehouse-style chain operating in the western U.S., seeing visits spike by a whopping 54.6% in March.