The Resurgent Retail Real Estate Sector
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CRE Market Insight: Retail Sector
November 2022
By Todd Alexander, Executive Vice President
According to a recent Wall Street Journal article, the retail real estate sector is enjoying its biggest revival in years. Vacancies are down, rents are up, and more stores are opening than closing.
The retail real estate industry’s turnaround reflects a wrenching, decades-long adjustment that included hundreds of retailer bankruptcies, widespread vacant storefronts, and plummeting demand for enclosed malls.
Despite many believing the pandemic would be the end of brick-and-mortar as we know it, store owners are emerging from COVID with surprising strength, posting some of their best numbers in years. In August 2022, retail sales – excluding gas, auto, and e-commerce retailers – advanced to $383 billion, a 19% increase from pre-pandemic levels (August 2019).
After being forced to buy more things online at the start of the pandemic, many people have decided they like shopping in stores for items ranging from clothing to groceries, in a reassuring sign for the staying power of brick-and-mortar. Shopping may not be everyone’s idea of how to enjoy themselves, bur for those who love it, there is nothing like the in-store experience.
Retailers Innovate and Accelerate Omnichannel Fulfillment Services
Analysts and retail executives say the pandemic forced companies to innovate and accelerate their integration of online and in-person services.
More companies are allowing customers to pick up or return online purchases in stores. During the 2021 holiday shopping season, store fulfillment drove sales two times higher for companies offering buy online, pick up in store services (BOPIS).
Today, owners of shopping centers and big box stores like Walmart, Lowe’s and Best Buy are designating more parking spaces for convenient curbside pickup. Target’s new Drive-Up concept enables shoppers to add a Starbuck’s order and return products, all without leaving their car! Some Petco stores offer online shoppers 10% off orders over $50 that are picked up curbside.
Quick-serve restaurants, banks and drug stores are all getting in on the game with new drive-through formats accommodating mobile pick up lanes.
According to McKinsey, 60 – 70% of consumers are now shopping in an omnichannel way. This integration of digital and physical shopping has served to improve the overall retail shopping experience and maximized the efficiencies of operating a brick-and-mortal store.
More New Retail Stores Are Opening Than Closing
Post-pandemic, the retail segment for commercial real estate has been strong. According to a report by the National Association of Realtors, demand for retail space has remained positive for seven straight quarters. In the third quarter of 2022, net absorption increased to 23.3 million square feet, a 22% increase from the second quarter.
For the first time since 1995, more new stores are opening than closing, according to an analysis by Morgan Stanley, and some analysts expect this trend to continue despite fears of a recession in 2023.
The national vacancy rate has fallen to around 6%, the lowest level in fifteen years.
And asking rents are 16% higher than five years ago. Through the first half of 2022, retail rates were up 4.3% year over year.
Retail in the Central Massachusetts and MetroWest Regions
These national trends in the retail industry coupled with the continued rise in population west of Boston have helped revive the prospects for property owners and tenants across the region. Evidence of growth can be found throughout the Central Mass and MetroWest regions in virtually every sub-segment of retail.
Grocery / Supermarket
Amazon Fresh ramped up its expansion with new leases in Westborough and Framingham. The Amazon Fresh supermarket concept brims with innovation and modern technology, including Just Walk Out technology which uses ceiling-mounted cameras and AI to track shoppers’ selections as they walk around the store and automatically charges them when they exit.
Market Basket is poised to open soon and anchor the new Edgemere Crossing development at 200 Turnpike Road in Shrewsbury. The mixed-use development will include a Starbucks, a bank and 250 units of housing. Grocery-anchored retail properties proved quite resilient during the pandemic and remain an attractive real estate investment for developers.
Kroger recently purchased Albertsons in a mega-deal uniting two of the country’s largest grocers. The combined company is expected to control nearly one-fifth of the US grocery market. In Massachusetts alone, the company owns 21 Star Market locations and 55 Shaw’s locations. In the Central Mass and MetroWest regions, there are 16 Shaw’s supermarkets. With 5,000 stores and annual revenue of about $200 billion, expect Kroger to be a fierce competitor locally.
Apparel
Sierra Trading Post has signed a lease at Northborough Crossing that begins in the spring of 2023. The online and brick-and-mortar retailer is owned by TJX Companies and offers products in categories such as outdoor recreation, adventure gear, clothing, and footwear.
Marshalls recently relocated from 230 Main Street to the Royal Plaza in Marlborough. This new Marlborough location is one of two Marshalls in the area. There is also a Marshalls at 32 Lyman Street in Westborough. In the spring of 2023, this Westborough store will be relocated to Northborough Crossing.
Furniture/Home-related
Ashley Homestore, a furniture and home décor superstore retailer, plans to open a new location next spring in a portion of the space vacated by the old Stop and Shop location in RK Speedway Plaza off Route 9.
At Home, a chain of 250 home décor stores operating in forty states, opened in Shrewsbury earlier this year. At Home occupies the storefronts of three closed stores, including Pier 1 Imports, Bed Bath & Beyond and Bob’s Stores.
Bob’s Discount Furniture and Mattress Store celebrated its grand opening last month in Franklin. The new location features a format that is one-third the size of its traditional furniture stores. The Franklin location is 10,650 square feet and is part of its new smaller footprint store concept.
Floor & Décor, a leading specialty retailer of hard-surface flooring, has permitted a location in Shrewsbury and is expected to open its doors sometime in 2023. This is in addition to their recently opened location in Bellingham.
Pet-related
Veterinary Emergency Group opened its 28th hospital for pets on Route 9 in Shrewsbury this past June. The new location is the fourth facility open at all hours in the metro-Boston region.
PetMedic Urgent Care recently opened this fall in Linear’s Plaza at Rt9 and Lyman Street in Westborough. PetMedic fills the gap between local family veterinary practices and emergency rooms. Westborough represents PetMedic’s third location (after Watertown, MA, and Portland, ME). A new Burlington, MA location is expected soon.
Banfield Pet Hospital signed a lease at RK Speedway Plaza in Westborough. This will be in addition to their existing presence at PetSmart in Northborough as well as other Metrowest locations in Framingham, Holliston, Millbury and Bellingham.
Dogtopia offers daycare, boarding and spa services for dogs. A new franchise is due to open shortly in North Attleborough in a deal brokered by Kelleher & Sadowsky. Dogtopia is a national franchisor with more than two hundred locations nationwide.
Health-related
ConvenientMD Urgent Care signed a lease (in a deal brokered by Kelleher & Sadowsky) in Leominster, MA and is expected to open in 2023. ConvenientMD operates thirty-five urgent care and walk-in clinics in Massachusetts, New Hampshire, and Maine.
Fitness / Sports-Related
Planet Fitness opened its second facility in Worcester at Lincoln Plaza earlier this year. The gym plans to open its newest location in Westborough at Westmeadow Plaza later this month (November 2022).
Public Lands, Dick’s Sporting Goods new outdoor specialty brand, opened last month (October 2022) in the space previously occupied by Bob’s Stores at Shoppers World in Framingham.
PXG, a manufacturer of premium golf equipment and apparel, opened its first brick-and-mortar location at 571 Worcester Road (near Whole Foods) in Framingham. The brand new 7,330 square foot store boasts an expansive retail showroom, three state-of-the-art cub fitting bays, a dedicated putter fitting studio, and a practice putting green.
Kids-Related
KidStrong – growing nationally as well as in New England – opened in Natick, Westborough, Stratham NH and just signed lease in Wayland (all deals brokered by Kelleher & Sadowsky).
The Little Gym, a physical development center for kids 4 months through 12 years old, opened at 400 Union Street in Westborough earlier this year in a deal brokered by Kelleher & Sadowsky.
Restaurant
Starbucks opened its fourth location in Worcester at the former Friendly’s location on Grafton Street last month (October 2022). The Seattle-based chain plans to open two thousand additional stores in the U.S. by 2025. The coffee giant said the expansion will enable the company “to meet customers whenever and wherever they want.,” offering a variety of formats including pick-up stores and drive-thru only locations.
Tropical Smoothie Café continues its huge franchise expansion nationally with new locations locally in Saugus and Foxborough. The franchise currently has more than 1150 locations throughout the U.S. and is actively looking for additional locations in Central MA and MetroWest.
The Mercantile, the rooftop bar and restaurant that opened in April in downtown Worcester is on track to be the highest grossing restaurant in Central Massachusetts! The Mercantile is a new brand by Boston-based Broadway Hospitality Group. Other restaurants include Tavern in the Square, The Derby, The Broadway, and The Playwright.
Ruth’s Chris Steak House debuted its fourth location in Massachusetts next door to The Mercantile in downtown Worcester earlier this summer. The new 8,250 square foot restaurant has reported above average sales for the first 3 months of opening.
Prevailing Headwinds for the Retail Sector Heading Into 2023?
Despite the encouraging news throughout the retail real estate sector, there are daunting challenges looming.
Rapidly rising interest rates, high inflation, and the prospect of recession could undercut retail sales and cause vacancies to increase in 2023.
Some major tenants facing significant financial pressure and have announced widespread closures. Bed Bath & Beyond is in the process of closing thirty-seven locations in nineteen states. Amazon 4-Star stores is in the process of closing sixty-eight brick and mortar stores in the U.S. and U.K.
Labor shortage will continue to impact the retail sector, both nationally and locally. In many instances, stores and restaurants have been forced to restrict hours because of the difficulty to staff operations.
Prevailing Tailwind for the Local Retail Sector Heading Into 2023?
The region west of Boston comprised of the Central Massachusetts and MetroWest regions is highly attractive and growing steadily.
The region’s residents are more educated than the state, with more than 50% having a bachelor’s degree or higher, compared to 42.9% statewide. Overall, the households and residents of the Central Massachusetts and MetroWest region are wealthier in comparison to households and residents statewide.
The 495/MetroWest region’s population increased by 44.4% from 1970 to 2018, compared to 20.1% statewide. The Central Massachusetts region grew 8.1% in population from 2010 to 2020, outpacing both the state (6.0%) and nation (6.5%), according to the U.S. Census Bureau’s Decennial Census of Population and Housing. And Worcester’s population grew 14.1% between 2010 and 2020, making it the fastest-growing city over 100,000 people in New England. Its population of 211,612 ranks Worcester as being the second-largest city in New England, only behind Boston.
Improving rail service, work-from-home, and continued migration of Boston companies to the west are causes for optimism that the region’s towns and cities will continue to grow. For retail site selectors, this is exactly the environment that they seek for new store locations.