Against the backdrop of a stunning slew of store closures in 2019, the retail segment this year actually is opening up opportunities for commercial real estate lenders, owners, brokers and investors.
A CrediFi report on retail lending trends released today points to a a 10% year-over-year rise in the number of $100 million-plus retail loans. In fact, this boost in financing for high-value retail properties, as well as for retail portfolios with cross-collateralized properties, means commercial real estate origination in 2018 fell less in the U.S. retail sector than it did in the overall CRE market.
Given these numbers, it’s clear that CRE lenders, owners, brokers and investors are managing to ferret out prospects even as the number of U.S. store closures mounts. This comes despite U.S. e-commerce sales jumping to $513.6 billion in 2018, up 14.2% from 2017, the U.S. Census Bureau reported in March 2019. However, that represented only about 10 percent of total U.S. retail sales in 2018, according to Statista.
Coresight Research tracked 5,524 announced U.S. store closures in 2018. That was down 32% from the previous year, but the number of announced thus far in 2019 is higher than at the same time in 2018.
Although e-commerce continues to make “relentless” gains in the retail market, retailers in the U.S. are opening brick-and-mortar locations at a “rapid pace,” Coresight Research says in a February 2019 report. Meanwhile, retail spending remains high, the report adds.
Lenders are recognizing the current staying power of brick-and-mortar retail, with the IBM 2019 Retail Forecast predicting a 3.04% year-over-year increase in brick-and-mortar sales this year, Chain Store Age reported.
A forecast from the National Retail Federation echoes IBM’s projection. The trade group predicted in February 2019 that U.S. retail sales this year will increase 3.8% to 4.4%, compared with 2018, to more than $3.8 trillion. That would follow estimated growth of U.S. retail sales of 4.6% in 2018 (to $3.68 trillion) compared with 2017.
“We believe the underlying state of the economy is sound,” NRF President and CEO Matthew Shay said. “More people are working, they’re making more money, their taxes are lower and their confidence remains high.”
In light of that optimism, U.S. retail vacancy rates are expected to remain fairly static, inching up from a projected 13.2% in the third quarter of 2019 to a projected 13.9% in the third quarter 2020, according to Statista.
What does all of this mean in terms of retail real estate (and, in turn, retail real estate lending)? Commercial real estate services company CBRE envisions strong retail fundamentals in 2019. That would suggest continuation of a healthy lending environment for retail real estate.
“As mall owners seek to drive traffic flow and reposition shuttered department store space, they will increase their redevelopment and re-tenanting activity. Across categories, retailers will continue to develop their omnichannel strategies and make significant reinvestment in their physical stores,” CBRE says.
Indeed, several developers are repurposing retail real estate for the 21st century.
In Plano, Texas, for instance, the owner of Collin Creek Mall is converting the property into a $1 billion mixed-use development that will add single-family homes, townhomes, apartments and offices. However, the retail component will not be lost. The developer plans to incorporate 450,000 square feet of retail and restaurants into the project.
On a larger scale, Brookfield Property Partners aims to redevelop at least 100 of the 125 malls it picked up through its $14.8 billion purchase of General Growth Properties. Brookfield envisions these malls becoming mixed-used “mini-cities.” The remaining malls will be redeveloped with an eye toward selling them.
In November 2018, Brookfield CEO Brian Kingston referred to the “mini-cities” concept as a way to “future-proof” the malls that it winds up keeping. Other operators in retail also are trying to figure out how to “future-proof” their assets.
“Many [media] outlets are touting the demise of shopping centers, but really, it’s more the restructuring of shopping centers,” Dave Wensley, real estate partner at law firm Cox Castle & Nicholson LLP, told GlobeSt.com in 2017.
Learn who’s backing retail loans in the U.S. by downloading CrediFi’s retail lending trends report.