Brick-and-mortar retail resilience

The reinvention of brick-and-mortar U.S. retail that began with the rise of e-commerce has continued its progression in the post-pandemic era. While online shopping stood at 16% of total retail spending as of Q4 2024, brick-and-mortar retail is exhibiting strength as U.S. retail sales and consumer spending remain resilient, supply remains muted, and retailers and consumers embrace omni-channel platforms. While the sector faces headwinds, recent consistent performance—and outperformance relative to other sectors—is reigniting investor interest and increased allocation to select real estate strategies.

Macro trends in U.S. retail real estate

Postpandemic, the now widespread use of e-commerce delivery methods such as “click and pick/buy online, pick up in store” and “ship from store” have reintroduced physical stores as a central hub for distributing goods. Neighborhood, community, and strip centers are effectively serving as last-mile distribution centers, particularly as many retailers seek to decrease the soaring reverse logistic costs associated with e-commerce return rates, which are substantially higher than those of in-store purchases. The importance of brick-and-mortar retail has therefore been reaffirmed, with the impact of e-commerce on retail sectors and subsectors varying greatly and having a more limited effect on several retail categories, including food and drink services, garden centers, grocery stores, and warehouse clubs.

At the same time, iconic digital brands have struggled to reach profitability and have turned to physical stores as part of the solution, underscoring the importance of this traditional channel. Over the past several years, hybrid work-from-home schedules have also strengthened strip center fundamentals, driving increased demand from retailers seeking to serve the needs of consumers while at home. Likewise, increasing numbers of return-to-office mandates have recently been underpinning some recovery in high street retail in urban centers. The overall health of the consumer seems stable and will likely help the retail sector maintain momentum throughout the year.  

U.S. retail’s solid fundamentals

U.S. retail real estate’s operating fundamentals maintain stable and positive momentum compared against historical performance. The sector entered 2025 with the lowest vacancy rate among the major commercial property sectors, with the United States potentially underretailed by 200 million square feet, or approximately 5% of total stock, due to slowing retail development over the past 15 years (following 10 years of oversupply) combined with steady consumer demand.  

Some risk is still present, with store closings recently surpassing openings. While this may represent a natural culling of nonperforming retailers that are no longer benefiting from an artificial pandemic-era boost, overall occupancy levels could be negatively affected. Challenges faced by the retail pharmacy sector, which faces increasing pressure from multiple competitive threats, including the growing number of online pharmacies, could magnify this impact. Last, the lack of new retail development over the past decade is hampering retailers seeking high-quality space, resulting in lower turnover rates that may limit rent growth given the tenant-friendly renewal options often seen in retail leases.

Retail center foot traffic increased modestly during 2024—up 0.4% year over year. Grocery-anchored centers demonstrated the strongest growth among retail formats, recording a 12% increase in foot traffic compared with 2019’s lows. Low-cost grocer Aldi was a leader in 2024 store openings, suggesting that any softening consumer demand may be mitigated by a shift toward necessity-based items in line with a pullback in discretionary spending, especially within low to middle income levels. The U.S. retail sector isn’t without headwinds related to mixed economic sentiment that could moderate consumer spending, but its supply-side dynamics are especially strong.

New strip center supply as a proportion of available stock is set to be the lowest among traditional sectors, with construction levels for new retail space falling to the lowest point this century. This supply correction, combined with an economic outlook signaling continued, albeit softened, retail consumption growth, makes the increase in store closures seen in 2024 appear to indicate a modest source of store space returning to a supply-starved market rather than a meaningful turning point in retail space market conditions.

The retail sector’s robust and stable investment performance

The retail sector continues to show resilience in the higher-rate environment, demonstrating the best performance among traditional commercial real estate (CRE) sectors from a depreciation and total return standpoint through Q4 2024. 

Supply is likely to remain muted as higher construction costs and cap rates mean retail developments—and CRE development in general—are currently unlikely to provide adequate returns on investment, but there could be exceptions in select markets since different retail sectors are performing differently. Necessity retail, such as grocery-anchored retail, is outperforming on an occupancy and return basis, while the enclosed mall segment continues to see tenant outflows in Class B and Class C centers that aren’t positioned for revitalization by sufficient investment of capital expenditures. 

Strip center retail is highly valued by consumers

Given their locations alongside major roads and housing areas, with the provision of low-friction access through large parking lots to a mix of local businesses and anchor tenants, the strip center retail sector is displaying its resilience. Strip center retail has consistently outperformed the total retail sector and other retail subtypes (mall and street) over every measured period (1–10 years).

What’s driving retailer demand?

The retail sector continues to reinvent itself by incorporating entertainment and experiential concepts that are either complementary or resistant to e-commerce. Eatertainment, which combines shopping with dining out and immersive experiences, and experiential retail that offers customers innovative, interactive shopping in a physical retail environment are forecast to grow strongly. By enhancing the customer experience alongside seamless shopping enabled by technology, these concepts are set to reconfigure brick-and-mortar spaces to meet growing demand. 

The resilience of value-oriented retail

E-commerce-resistant tenants are typically value oriented, necessity driven, and/or service driven. Economic uncertainty and rising inflation have led to consumers prioritizing essential goods that account for approximately 62.8% of consumer spending, as the U.S. Bureau of Labor Statistics reports significant price increases for essentials, with food and housing up over 23% from 2024.¹ Middle- to lower-income households are reporting a heavier financial burden compared with higher-income households, likely pressured by high credit card interest rates and rising household debt, even as credit card delinquencies hover around the 20-year average.

Discount/value-oriented tenants have been key in supporting the resilience of retail centers during economic fluctuations since lower-income households spend up to 80% of their income on necessities and a higher percentage of their after-tax income on transportation (30%–40% compared with ~10% for the highest-income quintile). Essential expenses, such as motor vehicle insurance (+16%) and rent (+5%) have seen significant price increases, straining low-income households that already allocate much of their income to basic needs. Diversified strip centers address time and disposable income constraints for lower-income individuals by providing convenient access to essential services and thereby reducing transportation costs. 

The evolution of service-oriented retail

These factors favoring value-oriented retail heighten the resilience of grocery-anchored centers with a high proportion of service-oriented in-line tenants, which have proven to be e-commerce resistant. Community-serving tenants, such as nail salons, fitness studios, and medical spaces in retail center (medtail) tenants, are attractive to long-term investors due to the resilience of their revenue streams, coupled with their ability to drive foot traffic. While leasing by service-oriented tenants dropped precipitously during the COVID-19 pandemic as quarantined consumers turned their spending toward goods, they’re now poised to overtake goods retailers in terms of leasing demand. 

The retail sector is also increasingly integrating healthcare tenants such as urgent care centers and outpatient clinics into neighborhood centers that facilitate easier access to healthcare services for diverse demographics. Health-related spending constitutes 23% of consumer expenditures, surpassing all other categories, including housing, which stands at 18.6%.² Medtail has increased from 16% in 2010 to about 20%, highlighting this growing demand.³

Beyond the growth of previously nontraditional retailers, demand is strong across store sizes, and the increase in shop occupancy has been particularly robust, with a good focus on small and medium-sized enterprises that have historically served as both engines of job growth and anchors to the surrounding communities.

Our approach to retail CRE

Investment themes are driven by

• Demand for necessity-focused, nondiscretionary items, including groceries that are more e-commerce resistant
• The growing role of brick-and-mortar retail in product distribution
• Consumer preference for brick-and-mortar retail when prioritizing efficiency and value
• Limited retail supply and stable consumer demand are likely to provide opportunities in high-growth markets that benefit from net migration
• A lack of new product prompting retailers to consider 2nd generation, adaptable space

As the sector's reinvention is fully deployed and the development pipeline is highly curated to retailers' renewed footprint strategies, investors are able to consider opportunities with more confidence in regard to brick-and-mortar positioning, and focus more stategically around long-term demographic prospects. Our real estate investment rationale centers on the ability to generate outperformance in two ways. First, by leveraging market-level intelligence to identify key growth nodes exhibiting a combinaiton of strong demographics and consumer spending trajectories. Second, through strategic asset management, investment, and tenant curation to establish a given center as a destination and thereby grow income. 

1 Oxford Economics, as of February 2025. 2 Oxford Economics, updated as of February 2025. 3 Costar, as of Q4 2023.