Retail Forecast Q3 2020

Nov 13, 2020, 09:45 AM by Christina Tong

The retail industry is entering a very different holiday season as COVID-19 cases are reaching an all-time high in the U.S.  Retail sales, however, are bouncing back strongly with Q3 retail sales growing 3.6% Y-O-Y. This is supported by both the strengthening of the labor market and fiscal support from the government.

Amazon's prime day event was delayed to October, which kicked off an early start for the 2020 holiday season. Other retailers are also following up with promotions and marketing to attract customers to shop early. The average Y-O-Y growth during the holiday season since 2010 averages around 4.1%. CBRE’s Retail Holiday Trends Guide  forecasts holiday retail sales growth of less than 2% this year, assuming there is no major resurgence of the virus or mandated store closures. ICSC is predicting a similar number, projecting 1.9% Y-O-Y growth in this holiday season.

We expected to see another surge of e-commerce from the holiday sales as brick and mortar stores face limited capacity, social distancing and consumers fearing indoor public spaces. However, brick and mortar spaces are still valuable in terms of providing omni-channel options for both retailers and consumers. And we believe buy-online-pick-up-in-store (BOPIS) and curb-side pickup will continue to be favored by both consumers and retailer even when the pandemic is over.

The availability rate for retail neighborhood, community and strip centers was at 9.4% in Q3 2020, up 33 bps from Q2 2020 and NCS registered a 0.13% increase in rent. We estimate the minor rent increase was caused by an increasing amount of more expensive spaces being listed, which elevated the average price. The impact on rent and availability will likely be more visible in the coming quarters, especially after the holiday season.

We expect a major increase in the availability rate which is forecasted to reach its peak in Q3 2021 at 12.7%, 405 bps higher than the pre-COVID level.  This impact also surpassed the negative impact from the Great Recession, which produced a 370 bps increase in availability rate at its peak.  In terms of rent, we are forecasting a more gradual decline and recovery. We forecast that rents will fall and reach the bottom in Q3 2021 and stay at the bottom until Q2 2022, then start to have noticeable bounce back in Q3 2022. The bottom rent registers a 9.8% decrease compared to Q1 2020.

On Monday, the news of a prospective vaccine gave retailers a strong boost of confidence. However, the risks of its effectiveness remain, and it will take months for it to be rolled out to individuals. We are still expecting a longer-term recovery in our NCS sector as retail bankruptcies and store closures continue. Retailers are rethinking their real estate strategy amid the competition from e-commerce. We forecast the Sum of Markets availability rate will stabilize by the end of 2025 at 10.0% and rent will not be able to recover to pre-COVID levels for five years.

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