U.S. RETAIL SALES GROW AMID CAUTIOUS OPTIMISM
U.S. retail sales increased 3.5% year-over-year in Q3 2019 to $1.57 trillion. Key economic indicators remain strong, including unemployment at a 50-year low of 3.5%. However, consumers likely will become more cautious in 2020 amid economic and political uncertainty, issues of affordable housing and fear of rising costs due to the U.S.-China trade conflict, all of which could slow retail sales growth.
All but four of the markets tracked by CBRE EA are expected to post positive net absorption in 2020 due to limited new construction and more retail stores opening than closing. Rent growth is expected in 44 of the 62 markets tracked by CBRE EA. Atlanta, Ft. Worth, West Palm Beach and Portland will be the top markets for rent growth in 2020. Neighborhood centers, redeveloped malls and new destinations offering food & beverage, entertainment and health & wellness will drive retail absorption in these markets.
PROLIFERATION OF MIXED-USE FROM RETAIL-ONLY
Retail-only may no longer be the highest and best use for many struggling malls and oversized retail assets that are well-positioned to transform into mixed-use town centers in the heart of communities where people want to live, work and play. Integrated new uses beyond traditional multifamily residential, office and hotel are flourishing. Co-living, coworking, recreation and entertainment, sports complexes, universities, public event space and green space are complementing shopping and dining destinations, creating dynamic urban and suburban environments and community connection.
There is no formulaic mixed-use solution to apply across portfolios or regions. Every mixed-use redevelopment is complex, unique and requires translation of broad trends into a specialized approach meeting the needs of each community and providing distinct localization. Development challenges include market demand, design, regulatory issues and zoning. The most problematic hurdles are typically reciprocal easement agreements (REAs) that govern each site. 2020 will be a landmark year for how the industry challenges, amends and restructures these often decades-old REAs to successfully integrate new uses.
FIGURE 12: TOP 10 MARKETS BY RENT GROWTH, 5-YEAR FORECAST
Source: CBRE Econometric Advisors Q3 2019.
TEENS RETURN TO THE MALL
The shifting demographic focus has been mainly on the baby-boomer “silver tsunami” and millennials in recent years. However, Gen Z is a cohort with tremendous spending power positively impacting brick-and-mortar retail, especially shopping malls.
Gen Z (born between 1997 and 2010) has officially entered the economy and will continue to drive traffic back to malls in 2020. This generation spends $143 billion per year and influences an additional $460.5 billion in spending by others, according to eMarketer. They are digital natives who consume collaboratively using all digital platforms to research, cost-compare and connect.
Gen Z favors retailers that offer a seamless shopping experience where purchases originated online are fulfilled in-store. According to a recent study by A.T. Kearney, 81% of Gen Z prefers to shop in stores and 73% likes to discover new products in stores. While the store experience offers Gen Z brand connection and immersion into the trifecta of product, service and consumer experience, it also serves as a form of “retail therapy,” providing respite from constant digital engagement.
THE HEALTH OF RETAIL
More retail stores are opening than closing. Thousands of new stores will open nationwide in 2020, including by once online-only retailers that recognize the brand value of a physical store, and by food & beverage concepts, grocers and franchisers. Pop-ups to test brand collaborations, launch new products or test new markets will proliferate in in urban markets and dominant malls.
Health & wellness is still in the early phase of growth, but already is one of the fastest-growing retail sectors fueling rapid expansion across the U.S. Consumers of every generation are spending more than ever on health care to improve quality of life, long-term wellbeing and self-care. New concepts in specialty fitness, beauty, healing collectives, meditation and sleep pods, as well as innovative models for traditional pharmacy, massage and facial concepts, are not just selling products and services; they are building communities of like-minded consumers. These brands are improving experience and loyalty through amenity-rich environments, customization, seamless online apps and subscription or membership-based models.
2020 will be a pivotal year for reinventing the retail landscape with a slowdown in new supply, the integration of sectors and uses in abundant mixed-use redevelopment, and the emergence of new brands.
U.S. Outlook by Sector
U.S. GDP growth will slow to between 1.5% and 2% in 2020, down from an average of 2.5% over past five years.
U.S. GDP growth will slow notably next year as various issues create higher levels of uncertainty, including the ongoing U.S.-China trade conflict, slowing global growth and a presidential election. Barring any unforeseen risks, we assess that a recession will be avoided, thanks in large part to the stimulatory effects of the Fed’s rate cuts in 2019. Slow growth will continue in 2020, broadly supporting already strong property market fundamentals.
Investment volume in 2020 should total between $478 billion and $502 billion, making it one of the strongest years on record.
Amid slower economic growth and global uncertainty, U.S. commercial real estate will remain a haven for investment in 2020. Greater investor caution and buyer-seller disconnects on pricing could moderately reduce volume from 2019 levels. Cap rates should be broadly stable, with slight compression for multifamily assets and slight increases for the other major sectors for an average spread of about 260 bps over 10-year Treasury yields next year. Investors should not count on significant appreciation returns, but income returns will remain steady.
Demand for office space will remain strong in 2020. Flexible space inventory will continue to increase, but at a slower pace.
Despite continued positive absorption of office space in 2020, rent growth will slow and vacancy will increase. Leasing activity will remain driven by tech tenants, benefiting markets like San Jose, Austin and Salt Lake City. Flexible office providers will strategically expand their footprint but a drawback by WeWork will significantly slow expansion from previous years. CBRE’s forecast is for 51.1 million sq. ft. in completions, a 70-bps increase in vacancy and 1.6% rent growth.
Absorption gains will be limited in 2020, with available supply outpacing demand. Nevertheless, rents will rise by 5%.
Despite some softening in the industrial & logistics (I&L) market, overall fundamentals will remain strong due to continued e-commerce penetration and demand for logistics space. Rent growth will be driven by newly constructed facilities and infill properties. Although there are potential trade-related risks, resilient consumer spending will buoy the I&L market and mitigate any tariff effects on major hubs relying on port activity.
Total U.S. retail sales increased by 3.5% year-over-year in Q3 2019 to $1.57 trillion, however more modest growth is expected in 2020 to $1.55 trillion.
Total U.S. retail sales growth is expected to slow in 2020, as consumers become more cautious. Positive net absorption and rent growth in most U.S. markets will be spurred by a lack of new supply and thousands of retail store openings. Malls are benefiting from the refreshing influence of Generation Zers, who prefer to shop in stores and are driving traffic back to brick-and-mortar retail. Many retail assets will convert to mixed uses, creating communities and thriving town centers.
The multifamily vacancy rate will edge up by 20 basis points to 4.5% in 2020, remaining under its long-term average of 5.1%.
Multifamily is positioned for continued favorable performance in 2020 but will experience some cooling due to new supply outpacing demand. Completions will match peak levels of recent years. New and potential rent control legislation will remain an industry concern. The best opportunities are in suburban markets, smaller metros and metro leaders, including Austin, Atlanta, Phoenix and Boston.
Interest in specialty sectors will continue, with alternatives accounting for more than 12% of all commercial real estate investment in 2019.
Investment in alternative or specialty sectors has risen steadily in recent years and will continue to attract high levels of investor interest and capital in 2020. Total investment in 2020 will come close to the annual average of $59 billion since 2014 and represent 12% of all commercial real estate investment, up from only 6% at the peak of the last cycle. Alternatives acquisition volume in 2020 likely will match this level.
New deliveries will increase the primary data center markets’ total inventory by 17.3% in 2019, increasing the competition between certain markets in 2020.
The wholesale data center sector continues to evolve as flexibility and agility within IT and real estate strategies drive decisions. Transaction volume remains driven by the adoption of Hybrid IT/multi-cloud access strategies by users. Adding momentum headed into 2020, network connectivity should remain a critical component of overall IT and real estate decisions. Demand will continue as users right-size and adapt their portfolios to handle current and future technologies, such as high-performance computing (HPC) and 5G.
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