Boston's Downtown Crossing shopping district at night in 2017. The Boston area’s high barriers to entry have suppressed new development and contributed to nine consecutive quarters of positive retail absorption. iStock photo
Retail properties have been challenged over the past several years, from the rise of e-commerce to COVID shutting down many in-person activities. However, after surviving these two existential challenges, brick-and-mortar retail is fundamentally stronger than it has been in memory, with national and local retailers still in post-COVID expansion mode and many landlords running out of space to lease. Given several factors such as the lack of available land for retail development, as well as the fact that construction costs far exceed the price per foot to acquire existing properties, we do not see anything on the horizon that would dramatically change retail real estate’s desirability to investors.
Looking back, it now appears that in some ways COVID allowed for stronger fundamentals within the retail space thanks to the elimination of shaky retailers which freed up space for expansion for new retail concepts as well as well-capitalized retailers. In addition, after being quarantined within their homes, many Americans have recognized that shopping and dining out are a critical part of “normal life,” one they may not be willing to give up in favor of shopping online. As people have endured the extremes in terms of consumer experience, more balance may be in store with a high frequency of omnichannel options becoming available.
This method of retailing is not only most convenient for the consumer but also for retailers looking to cater to consumers’ focus on convenience.
New England’s core retail markets lack the necessary retail space to meet the demand for both incoming tenants and those looking to expand. The supply shortage is a function of a shallow development pipeline due to challenging zoning, limited available sites and high land cost. More specifically, there has been very little new retail construction of any significant size since the Great Financial Crisis of 2007-2008.
This lack of new development for more than a decade has led to nine straight quarters of positive retail absorption. In addition, lack of available space and sky-high construction costs has resulted in retail tenants being “stickier” than ever, as the friction of relocating or closing stores has increased significantly.
Given increasing tenant demand and a static supply side, the market has seen strong rental growth which we expect to continue.
Nat Heald
Investor Interest Returns to Sector
CBRE is seeing increasing investor demand for shopping center offerings. In part, this growing demand can be attributed to the strength of the underlying fundamentals discussed previously. However, retail is also in the spotlight today due to the fact that of all the major commercial product types, retail is the only one that couples strong fundamentals with enticing current yield.
Boston’s asking rent growth over the next two years is predicted to be about 3.7 percent with a positive change in availability of 30 basis points.
Retail investment sales volume rose 18 percent year-over-year in 2022, hitting the highest level since 2015 while other asset classes fell in the negative double digits demonstrating how investors are benefiting from market conditions.
Rob Robledo
Forrester estimates that e-commerce penetration of food and drink is just 7.5 percent.
M-commerce, or media commerce, is becoming a majority influence on how brands get recognition from consumers. Digitally influenced retail sales now represent 60 percent of the total and will make up 70 percent of total retail sales by 2027.
Nat Heald is an executive vice president in CBRE’s Boston office and leads the firm’s retail investment sales practice in New England. Rob Robledo is a senior vice president with CBRE’s retail advisory and transaction services team, where he leads the suburban retail team.
