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Recession Depression or Retail Revival?

by foxtrot

Posted on July 13, 2022

The economic outlook and the potential impact of big-picture financial trends on retail real estate

The financial headlines can look a little dire these days. From skyrocketing inflation to rising gas prices to record low levels of consumer confidence, there are plenty of reasons to keep a watchful eye on the national economic outlook.

But how concerned should retail professionals really be at this point? Where do we stand today, and what are the industry implications if the ominous clouds on the horizon really do coalesce into a recessionary storm?

There’s no doubt that we are already in a correction. High interest rates are top of mind for landlords, owners, tenant reps, and construction professionals. Landlords arguably bear the brunt of a higher rate environment, making it more expensive to borrow, build, and offer attractive tenant allowances. Together with what continues to be a tight labor market, it makes for a potentially concerning combination for small businesses and national tenants alike. It impacts retailers’ ability to operate their businesses and can put expansion plans on the back burner. On the construction side, higher costs continue to be a factor. They have stabilized somewhat, but remain an issue of concern. There’s a similar dynamic with supply chain disruptions, where the extreme delays of 2021 might be behind us, but predictability and consistency remain elusive. It’s not entirely clear (at least not yet) whether the improvement we’ve been seeing in recent months are the result of construction professionals adapting and getting savvier about avoiding delays, or whether the underlying supply chain dynamics are improving. It might be a little of both.

As retail leasing experts, we naturally tend to focus on leasing activity and what’s in the pipeline—and that’s where things start to look up. Because here in the Mid Atlantic, at least, leasing activity remains strong. despite those economic headwinds, we are still moving forward and still seeing a healthy amount of activity. Grocery stores and outdoor and sports concepts are doing particularly well at the moment.

Anecdotally, things seem to have slowed down somewhat in late spring in some other parts of the country, but national tenants are still expanding in our footprint. One thing to keep an eye on moving forward is that leasing and planned expansions for national brands can be somewhat of a lagging indicator when we are headed into a recessionary cycle. The lag time between announcing new expansion plans and the time it takes to get deals done means that a slowing economy typically comes well before big brands are able to pump the brakes on new opening. A better canary in the retail coal mine might be the smaller local and regional brands. If their expansion plans change, that’s a sign there might be leaner times ahead.

More good news from the Mid Atlantic is that vacancy rates have not increased, collections have not become an issue, and we aren’t seeing tenants asking for rent reductions and other special considerations. And there are other reasons for optimism that aren’t just regional in nature. National unemployment numbers remain surprisingly low, and retailers’ earnings numbers haven’t taken a big hit. Consumer confidence bears watching, however, as worry can become a self-fulfilling prophecy if consumer behavior changes and retail sales start to slow. In the meantime, absent any other big events, the appropriate posture seems to be one of watchful caution—or perhaps cautious optimism. Despite some concerning financial news, the retail sector is holding up well, and the hope is that the current correction is more of a dip than a sustained recession. That’s a deal we’d all sign off on.