Is Inflation Anxiety Hurting the Retail Real Estate Market?

Earlier this month, Bisnow reported that  foot traffic was down at U.S. grocery-anchored retail centers in the U.S. during the third quarter due to inflation. Retail industry analytics provider Placer.ai recorded a 3.93% decrease in grocery store  visits in Q3. That trend could be troubling for the retail real estate market as grocery stores are traditionally strong earners and improve co-tenant performance in sites they anchor.

With America’s  inflation rate hitting a 40-year high this summer, the public’s purchasing enthusiasm has taken a hit. It isn't on course to recover in the near term; The Consumer Price Index climbed by 0.4% in September from August and  8.2% from September 2021. As a result, market watchers believe the U.S. Federal Reserve will increase interest rates by 0.75% in November and December.

Even so, analysts have determined America’s brick-and-mortar space is stronger than it has been in years.

Grocery Demand is Changing, Not Falling

Ethan Chernofsky, Placer.ai VP of Marketing, believes that the foot traffic trend his company uncovered in Q3 is an indirect consequence of rising inflationary pressure. “Inflation definitely has an impact, and it changes some of the patterns of where we shop,” said Chernofsky. “Gas prices are really significant because they say to the consumer, ‘Go out less.’” Although the price of the pump has fallen significantly from the  record highs it hit this summer, consumers are ordering more food and household essentials online.

In the third quarter,  grocery e-commerce revenue rose by 4% year-over-year, with pickups growing by 1% and deliveries rising by 20%. The increase makes sense as Uber and DoorDash have recently expanded their grocery store offerings. There's never been a point in American history when it’s been easier to skip the regular market run.

In addition, consumers have been making more budget-conscious decisions when shopping, driving interest in big-box retailers. Placer.ai Costco and Sam's Club saw increased foot traffic during the September-ending period as inflation anxiety pushed the public to buy in bulk. Walmart, Sam's Club's parent company, reported the membership-based warehouse retailer saw its  sales jump 13.95% annually in Q3.

Conversely, Kroger, America's second-largest grocer, saw a 9% dip in visits to its anchor stores last quarter. While its supermarkets held up better than rival shopping centers, it's clear that there has been a decrease in foot traffic. But that doesn’t mean people are buying less food; U.S. grocery revenue hit $71.13 billion last quarter, up 7.6% from 2021.

The bottom line is retail centers anchored by grocery stores aren’t bringing in shoppers at traditional levels because of inflation anxiety. But demand for meat, cheese, bread, vegetables, and other essentials is evergreen even if the neighborhood markets face headwinds generated by the looming recession. The question then becomes how inflation anxiety is impacting the broader brick-and-mortar segment.

Retail Real Estate Vacancies Hit 15-Year Low

Even with the challenges it is facing now, the U.S. retail real estate market is doing well. The Wall Street Journal reported  vacancy rates dropped to 6.1% in Q2, its lowest level in 15 years. The Real Deal noted that rents increased during the same time frame. Morgan Stanley found that more new stores opened in America last year than at any time since 1995, and it expects that trend will continue in 2022 despite mounting inflationary pressure.

The sector’s resurgence is a significant reversal of the downturn trend that’s been affecting the segment for decades in the U.S.

Hundreds of once-dominant brands have  gone bankrupt, leaving behind empty storefronts across the nation and causing  shopping mall foot traffic to plummet. At the same time, Amazon became a trillion-dollar brand by mainstreaming e-commerce and supplanting many long-standing brick-and-mortar brands. The coronavirus pandemic and its attendant social distancing mandates accelerated the seemingly inevitable transition from physical to online shopping.  

However, the revival of the retail real estate segment shows that the situation is more complex than it might appear. Instead of an unstoppable decline, the real story is one of transformation. Many brick-and-mortar retailers have adapted to changes in the landscape by integrating an online shopping component into their operations.

Last year, Amazon generated more than six times more e-commerce revenue ($468 billion) than Walmart ($75 billion). But the  physical retailer’s online sales grew five times faster than its rival’s. The paradigm shift would account for  Amazon snapping up abandoned malls and turning them into fulfillment centers. It would explain the Wall Street Journal’s findings that shopping center owners are expanding their parking lots to accommodate greater pickup visits.

It’s important to note that there is some undersupply in the retail segment.

The physical retail market’s contraction, especially during the Great Recession, prompted a slowdown in developing new sites. But the tide is turning, with Brookfield Property Group, a leading commercial real estate firm, adding 23 million square feet to its portfolio in 2022 to accommodate demand. Luxury retailers Cartier and Ralph Lauren intend to expand their footprints in the next few years because their  products are insulated from economic uncertainty.

That said, the American retail real estate segment's outlook is positive. Bed Bath & Beyond is in the process of  closing 150 of its stores, and large providers like Best Buy and The Gap recently cut their financial forecasts. With the Congressional Budget Office not expecting the  U.S. inflation rate to normalize until 2024, consumer anxiety won’t ease soon.

However, development firms can weather the storm by embracing the power of analytics. By depending on aggregated real-world data rather than anecdotes, leadership can identify big opportunities and avoid prospects that aren’t as good as they seem. Download our  4 Recession-Proof Asset Classes white paper to learn more about the property types that have untapped potential even during economic uncertainty.