2023 Retail Commercial Real Estate Market Trends

At Beta, we provide strategic solutions that enhance the commercial real estate transaction process. Beta’s unique market insights create a competitive advantage for our clients. The following are a few market trends you may find insiteful.

  • Merchants footprints will continue to change as demand of the consumer evolves.

As consumer demand shifts, many up-and-coming merchants will implement small store development strategies in brand relevant neighborhoods instead of conventional flagships. Other retail business models, such as online grocery delivery, buy online and pick up in store “BOPIS”, and apparel resale, will continue to cause merchants to adjust store size. An increasing number of stores will need need to reset or relocate showrooms for increased digital sales as well as utilize larger back of house area for fulfillment areas.

Article: In store technology trends

  • Increased relationship with community

A shopping environment can serve as a community hub that provides efficiency, connectivity and convenience, and a sense of pride for the community. By increasing relevance to a community, shopping center owners and retailers create greater points of differentiation. Property owners and merchants alike have a connection and a responibility to the community they serve. Each should embrace its role as a stakeholder in the community by providing a relevant sense of place for the community; a place to meet and share experiences and not just a place to buy merchandise. Businesses operating within shopping centers provide amenities to those living and working within a community. They also deliver tax revenues that support schools, health services, and police and fire departments which continues to become more important to the communities served.

  • The role of digital shoppingwill continue to have a more significant role in store. 

Innovations in digital technology will create a more immersive and more convenient shopping experience. Buy online and pick up in store (BOPIS) will also gain in popularity. Expect to see more frictionless check outs and mobile apps, providing e-merchant product information that enable greater consumer interactivity. AI smart mirrors will also introduce shoppers to consumer relevant products, based on what they’re wearing.  Each of these digital experiences should provide for a more enjoyable and interesting in-store shopping experience.

Article: Retail dive in store technology trends

Article: 14 Examples of Digital Technology in Retail Stores

  • While Rent will increase for well-located retail assets, Base Rents may not rise proportionately.

Community serving retail centers maintain historically low vacancies and have experienced growth in Net Operating Income. However, operating expenses which often represent between 20% – 50% of gross occupancy costs will grow disproportionally to overall occupancy expenses. The cost of operating CRE is increasing faster than YOY retail sales, especially in CBDs.

  • Consumer Shopping Patterns

The trend of employees returning to office continues to increase, however the average length of daily stay and the number of days per week spent in office remain below pre-2020 levels.

As the tug of war between return-to-office and remote workplace continues, consumers will modify shopping patterns and this will create operational challenges for merchants to properly stock and staff stores.

Chart: Office Visit Trends 2019-2022 (via Placer.ai)

  • Commercial Property Loans

Commercial property loans have become much more difficult to obtain as the Fed maintains higher interest rates to curb inflation.  The cost of debt nearly doubled in 2022 and lender underwriting criteria tightened significantly.  As a result, property values have decreased even while net operating income did not decline.  While no one knows for certain what will happen with inflation in 2023, we project interest rates to flatten and spreads to tighten as the capital markets gain greater overall economic clarity.   As a result, s/c sale and refinance velocity will increase.

Chart: 30 year Fixed Mortgage Rate vs. 10-year Treasury Yield (via Wolfstreet.com)

  • Closing Statement

Every shopping center is unique and has its own story. Each of these predictions may not apply to every property; they are intended to provide insight to the ever-changing commercial real estate market.

Beta collaborates with our clients to create strategic solutions that enhance the real estate transaction process. Our team implements advisory services, analytics, and creative marketing solutions to create a competitive advantage in the marketplace for our clients.

We are always purposely progressive in Beta!