Retail assets were hard hit when COVID-19 swept the U.S. in 2020 and forced officials nationwide to issue stay-at-home orders and close some outlets in a series of lockdowns. Consumers stopped going out, and businesses large and small struggled to weather the collapse of in-store sales.

However, as the country adapted to the pandemic and the economy recovered from the initial shock, sales rebounded, as did traffic in malls and stores. As a result, most metrics and data points are now turning more positive and pointing to brighter days ahead for retail assets.

Resilience and stimulus

The American consumer remains resilient. Government stimulus checks increased savings and set the stage for a sharp jump in spending. The rate of growth has slowed over the last few months but nevertheless continues to increase (Exhibit 1). Although the more tepid pace since March has been disappointing to some, this period hasn’t had the benefit of multiple rounds of direct stimulus payments to spur spending. So, although there has been a deceleration from the breakneck growth experienced in the first quarter, recent increases should be viewed as a positive indicator of demand from the American consumer.

Earned wages are steadily growing as well. They are past pre-pandemic peaks and are taking over as the driver of demand. In short, we appear to be transitioning back to a model in which retail sales are driven by economic growth rather than government intervention. This is a more sustainable system, which we expect to continue.

Consumer spending drove a steady increase in sales in August

RETAIL SALES AND FOOD & BEVERAGE

Source: Moody’s Analytics, U.S. Census Bureau; data as of August 2021. The data excludes motor vehicles & parts and gas stations.

Forward-thinking retailers

Brick-and-mortar retailers were not sitting idly by during this period. Many took steps to respond to new preferences as consumers adapted to shopping during a pandemic. Although it may seem counterintuitive, brick-and-mortar retailers put significant effort into building out their online presence to help drive sales through their stores.

As a result, buy online, pick up in store (BOPUS), curbside delivery and in-store fulfillment adoption grew quickly. These services expand the function of stores from showrooms and in-person sales engines to mini distribution centers. This helped brick-and-mortar retailers regain a sizable portion of the ground lost to internet competition during the early days of the pandemic.

These services should remain popular once COVID-19 challenges fade. When combined with more consumers shopping in person, these adaptations should continue to drive sales and help fend off e-commerce competition, increasing both the utility and the value of brick-and-mortar retail locations.

A surge in services

Spending on in-person services is also improving. Services spending fell sharply as COVID-19 took hold and lagged the early rebound seen in goods spending. However, services spending has continued to improve since the second quarter of 2020 and is now back above pre-pandemic levels. The availability of multiple vaccines, improved therapeutics and a better understanding of how to protect oneself from COVID-19 transmission have bolstered the confidence of consumers to again enjoy the experiences and in-person interactions they were denied for the last year and a half.

The sales generated from this spending are most beneficial to brick-and-mortar centers because they typically require face-to-face transactions and cannot be replicated online. After falling by 50% in early 2020, sales at restaurants and bars have rebounded to almost 10% above pre-pandemic peaks. However, it is not just dining out that is doing well—gyms, theaters and other drivers of foot traffic are seeing gains, too. Almost all of the categories that helped retail centers succeed and fend off internet competition before COVID-19 are seeing improvements, which bodes well for future demand.

Encouraging foot traffic and performance data

Traffic and performance data reflect this improving narrative. Foot traffic counts from Placer.ai show both strip centers and malls are near or above pre-COVID-19 levels. This is supported by Chase card spending data, which show “card present” spending on hotels, theaters, restaurants, parks and other recreational services exceeded March 2020 levels in the second quarter of 2021.

Other favorable data points: New business listings on Yelp are running above average, store closure announcements are well below the levels of the last few years (Exhibit 2), and responses to JLL’s holiday shopping survey point to a strong holiday shopping season. Retail REITs are also reporting positive results, with both malls and strip centers outpacing expectations on occupancy, leasing activity, net operating income (NOI) growth, tenant sales and rent collections. The REITs also report significant collections of back rent, indicating that many tenants are healthier than expected, and pointing to continued positive operating performance.

Retailers have rebounded from 2020, with far fewer closures projected this year

RETAIL SPACE ANNOUNCED FOR CLOSURE (MN SQUARE FEET)

Source: CoStar Advisory Services; data as of July 2021.

Consistent improvement

Across multiple metrics and data providers, a consistent story of improvement is emerging for retail assets. The sector still has a way to go in its recovery, but current momentum seems to be moving in the right direction. Transaction indices are showing rising values as more of the positive fundamentals are reflected in pricing. We have also seen write-ups in appraisals for both malls and strip centers. Given all the positive news coming in, it is reasonable to expect these pricing trends will continue.

Challenges remain, as brick-and-mortar retailers still face internet competition and industry consolidation, but we believe best-in-class assets will hold up well and could benefit from a flight to quality.

Additional COVID-19 waves remain a concern, but it seems unlikely there would be a complete reversal of this progress. At this point, most people seem opposed to renewing lockdowns and have shown a willingness to start living with COVID-19 risks as part of everyday life, at least to some extent. The retail sector sustained some of the largest declines in values early in the pandemic, but a strong economic rebound and resilient consumers have turned momentum positive again. The narrative of a struggling sector has given way to improving fundamentals and rising asset values, which should continue to climb for some time.