The last two years have upended a decade worth of conventional wisdom about the real estate industry, and the team at Moody’s Analytics is digging into the data to find out what’s changed, what hasn’t, and why. Senior Economist Thomas LaSalvia and Economist Ermengarde Jabir sat down with The Real Deal to discuss the findings in their recent white paper “Retail Openings: The Continued Lure of Brick-and-Mortar Shopping” as well as their predictions for the future of the retail landscape. In this exclusive interview, these researchers walk us through their surprising conclusions and discuss the underlying market dynamics that are driving the current wave of pandemic-conscious retail strategy.
“We see the whole landscape evolving,” said LaSalvia, whose team generated a series of white papers throughout 2021 on retail analysis. Their research uses trends in e-commerce sales as well as store openings to make sense of the fluctuating world of retail, which has been forced to adapt to the new conditions brought about by the COVID-19 pandemic. The story has some surprising twists and turns: for example, when the “share of e-commerce sales as a percental of total retail sales spiked out of necessity” in April 2020, jumping from 11% to nearly 16% in just a few months, LaSalvia and his team “thought that was the start of a more permanent shift.” However, since the beginning of 2021, the trend has seemingly reverted back to its original growth path, with e-commerce accounting for a respectable 13.0% of retail sales by the end of Q3 2021.
This whole year we’ve made retail such a big part of our research agenda because there’s been so much flux.
The Discovery Element
The relationship between e-commerce and brick-and-mortar locations is also changing, with many previously online-only retailers opening physical locations to bolster their brand identity. E-commerce retailers including custom eyewear vendor Warby Parker and jeweler Blue Nile opened additional brick-and-mortar showrooms throughout 2020 and 2021 with plans for more openings in 2022 and beyond. “These stores are using their physical footprint as a means of advertising,” said Jabir. “They find that paying rent is a valuable marketing tool .” Another factor driving these openings is the need to give customers a shopping experience tailored to the specific wares that are for sale, be they discounted clothing or ultra-luxury furniture. In all of these cases, according to Jabir,
that tangible discovery element where the customer has an experience is becoming increasingly crucial in order for stores to survive.
Tracking Consumer Behavior Through Retail Openings
The top growth categories from 2019 to 2021 tell the story of an American populace whose consumer preferences were being shaped by the pandemic in real-time. As the pandemic began in 2020, openings for full-service restaurants and new car dealerships dropped while those for limited-service restaurants, grocery stores, and auto parts shops rose. While the shift away from in-person dining and toward at-home dining and meal prep was driven by health and safety concerns, Jabir attributes the move away from new car purchases and toward increased automotive maintenance “in part to the microchip shortage” as the cost of both new and used cars rose sharply. This is an example of the complex ways in which pandemic-driven supply chain issues caused major downstream effects in the real estate industry.
The data also revealed how Americans’ travel habits were shaped by the pandemic. “During the summer of 2020, people were traveling by automobile,” said LaSalvia. “They were going to hotels, but often ones that were close enough to go by car” rather than locations reached by airplane. As such, gas stations with convenience stores saw major openings in 2020 and 2021. These trends varied by region as well, with hotels in warmer states and further away from major urban areas thriving while many owners of urban hotels began marketing them to buyers as business travel declined.
Retailers Relocate to Safer Areas
When it comes to tracking where these openings are taking place, the Moody’s Analytics team used its proprietary Commercial Location Score (CLS) to figure out what factors played most heavily into where companies chose to open new locations. The factor that stuck out most to the researchers was the Safety score, which is based on the count of property and violent crime per the ambient population. While average Safety scores for newly opened locations pre-pandemic had been trending below the national average Safety score for existing locations, retailers prioritized store openings in areas with higher Safety scores in 2020 and into 2021.
Safety is becoming an increasingly important component in the decision calculus for retailers who are opening new locations.
In fact, in Atlanta, the researchers observed a one-to-one ratio of closures to openings among some retailers as stores relocated from less safe to safer locations. One interesting potential driver of this shift is the overall drop in retail rents during the pandemic, which has allowed retailers to prioritize safety without paying a rent premium.
Wrapping Up
In the end, LaSalvia found the “resilience of retail through the pandemic” to be the most surprising takeaway from their research. “Multifamily and industrial are growing rapidly, but the fact that retail held firm and is even showing signs of growth is just fascinating to me.” As the researchers made their way through the data, they found that the pandemic changed some things about Americans’ retail preferences while leaving others essentially the same. While more Americans are traveling via car and holding on to older automobiles, the bump in the percentage of e-commerce sales turned out to be brief. “People do want human interaction,” said Jabir. “Even though it’s easier to simply click a few buttons and have the package arrive to your door, a pressing desire still exists to try on clothes before purchase or see an item in person in order to capture the complete shopping experience. ” These findings will guide Moody’s Analytics’ future research as the team digs into areas including hotels in additional case studies, which are certain to reveal more interesting and unexpected elements of our society’s ongoing response to the COVID-19 pandemic. In an ever-changing world, we can count on researchers like LaSalvia and Jabir to help us make sense of the current commercial real estate landscape and where it is headed.
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