- The COVID-19 pandemic drove a year of transformative change for commercial real estate in 2021.
- Looking into 2021 and beyond, there is some degree of uncertainty about how entrenched these changes are. However, in the near term, there are several general trends that CRE investors should be aware of.
- Digging specifically into the retail sector, there are a separate set of trends that are expected to drive the retail shopping experience of the future.
- These trends include omnichannel sales, omnichannel fulfillment, enhanced wellness protocols, and the addition of an experiential component to the shopping experience.
- Retail investors and developers should take note of these trends and adjust their strategy accordingly.
There is no doubt that 2020 was a transformative year in the commercial real estate industry. The COVID-19 pandemic accelerated the pace of many changes that were already under way and has forced investors and tenants to completely rethink the way that space is used and the way that their businesses are run.
Looking into 2021 and beyond, it is yet unclear which of these changes have real staying power versus which were an immediate reaction to the pandemic. Either way, they are not to be ignored. For individual investors looking to allocate capital to CRE assets, there are a number of emerging trends that they should be aware of.
Broadly, there are four general trends that investors can expect to see in 2021.
General Trend #1: Multifamily Will Continue to Grow
Housing is a primary need and individuals tend to prioritize their rent payments above all else during times of economic distress. Because multifamily is the form of housing with the lowest barriers to entry, it is expected that it will continue to grow. However, it may look different.
There is ample evidence to suggest that renters will continue to abandon urban cores for the additional space and lower rents offered by the suburbs. In addition, affordable housing will remain a concern as stagnating wages combine with rising rental prices to lessen affordability in the most sought after areas.
General Trend #2: Interest Rates Will Remain Low
In an unprecedented effort to provide stimulus to the US economy, the Federal Reserve has cut interest rates to all time lows. In addition, they expect to maintain these historically low levels through 2022 and possibly even into 2023. As a result, the interest rate forecast in the near term continues to be favorable, which is good for borrowers that need to access capital markets.
General Trend #3: Demand for Industrial Properties Will Remain Strong
Sharp rises in e-commerce/Amazon purchases and demand for “last mile” deliveries will continue to drive strong interest in industrial real estate. According to CBRE research, every $1 billion in incremental e-commerce spend generates demand for an additional 1.25 million square feet of warehouse space. Given that 2020Q2 e-commerce sales rose 44.5% from Q1, demand is expected to remain robust. In fact, the same research report estimated that there will be 250 million SF of industrial space absorbed in 2021, well above the historical absorption of 211 million SF annually.
General Trend #4: Retail Properties Will Change
Perhaps no other commercial real estate asset class has seen or will see more change than the retail space. The pandemic has drastically altered shopping behaviors and retailers will respond to these changes with expanded offerings and differentiated shopping experiences.
Specifically, there are five trends that are expected to change the face of retail in 2021 and beyond.
While it is certain that the retail shopping experience will continue to change, there is some degree of uncertainty about how much. The great unknown is whether retail is entering a post-pandemic “new normal” or if it will return to pre-pandemic standards? It may take some time for these answers to materialize, but there are five trends that retail investors should be aware of in the shorter term.
Retail Trend #1: Omnichannel Sales
For both COVID and non-COVID reasons, retail businesses can no longer depend on just their storefront to generate sales. Their shopping experiences must be optimized for a digital world and all digital devices. This means that retailers need to sell through both their storefront and all available channels like their website and social media. This requires a significant investment in digital capabilities and an expansion of the traditional sales strategy. Fulfilling these multi-channel orders leads to trend #2.
Retail Trend #2: The Increasing Importance of the Stock Room
In order to fulfill the orders coming in through multiple channels, retailers – especially the smaller ones that lack centralized distribution – will continue to convert sales floor space into miniature distribution centers in the stock room. Here they will pull, pack, and ship orders that come in through digital channels. In addition, they may be used as a space to manage local pickups.
This type of omnichannel fulfillment makes the stock room and storage space increasingly important.
Retail Trend #3: Increased Spacing & Enhanced Cleanliness Protocols
At least in the near term, it anticipated that consumers will continue to expect enhanced safety and wellness protocols from retailers to minimize the risk of entering a public shopping space. The exact procedures will vary depending on the property type, size, and market. However, it is expected that they will include things like: regularly cleaning and disinfecting shopping carts and credit card keypads, enhanced spacing to keep customers distanced, upgraded air filtration systems, hand sanitizing stations, and limitations on the number of customers allowed in smaller stores.
Retail Trend #4: Increased Use of Augmented Reality as a Sales Strategy
Granted, this is geared towards younger demographics like millennials, but the most advanced retailers will ramp up their use of augmented reality as part of an omnichannel sales strategy. For example, use of this technology can allow a consumer to try on clothes virtually or to see what a new paint color may look like on the walls of their home.
Use of these strategies is supported by the near universal presence of smartphones and tablets. Research shows that the increased use of AR in sales isn’t just safe for pandemic concerns, it can also help reduce returns and boost brand loyalty.
Retail Trend #5: Retail Shopping as an Experience
To overcome the inertia of getting a consumer to leave their home, retailers will increasingly add an experiential component to the shopping experience. For example, Nike does this well. Instead of just bringing customers to their store to purchase a pair of shoes, they are ramping up the in store experience by creating events like basketball games and interactive brand building experiences to allow customers to truly experience their products, not just try on the shoes. This trend will be particularly prevalent in large cities like New York, San Francisco, Los Angeles, Austin, Dallas, Raleigh, and Nashville.
So, What Do These Trends Mean For Investors in a Post-COVID World?
Again, it is difficult to determine the sustainability of many of these commercial property trends. They appear to be entrenched for the short term, but what will become of them over the next 3 or 5 years?
For example, will remote work, working from home, or coworking become the new norm? Or, will workers be happy to return to traditional office buildings once the coronavirus pandemic is over and lockdowns have been lifted?
From a real estate investment standpoint, a return to the fundamentals of cash flow analysis is important to ensure that tenants of the future have the financial resources to make their rent payments through all phases of the economic lifecycle. In addition, it will be important to evaluate their business models to ensure it is consistent with these emerging trends. For example, if a retailer is not actively expanding into an omnichannel sales strategy, they may represent a bigger credit risk than a property owner wants to take.
From a development standpoint, it is important for builders to take note of these trends and to rethink how they build or renovate space. For example, retail shopping centers of the future may have smaller sales floors and larger stock rooms. Or, they may have dedicated parking spots for local pickups. Those who spend the most time thinking about these trends will be well positioned to take action and ensure high demand for their assets.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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