Inflation’s Impact on Retail Real Estate
Colliers International, Toronto, said consumers are not alone in feeling elevated inflation–higher costs are problematic for retailers, too.
Colliers reported retailers’ prices rose more than 9% last year and said cost inflation could exceed 13% this year, compressing retail margins and profits.
“The volatile consumer and macro-economic environment continue to challenge the retail industry,” Colliers said in its Fall 2022 U.S. Retail Report. “In 2021, the risk was on the upside, as demand for goods continued to surge and consumers returned to spending on services like restaurants; in 2022, it is a downside risk. Consumers’ spending expectations are falling as they struggle with political discord, climate change, wars, domestic terrorism and high inflation.”
The inflation rate reached 9.1% in June–the highest since the 1980s–before dipping to 8.3 in July and August. “We are seeing early signs of a potential pull-back as consumers engage in frugality, cutting back what and how much they buy, trading down in brands, and eliminating big-ticket items,” Colliers said.
If inflation remains persistent, retailers will have to take measures to streamline their operations, retain customers and drive profitable growth, Colliers said. “Those measures provide retailers an opportunity to support consumers by tailoring products and services to their needs and budgets,” said Nicole Larson, Research Manager of National Retail Research with Colliers. “Although commodity and energy prices have recently begun to fall, they remain elevated, which will continue to effect retailers in manufacturing, logistics and operations.”
Larson noted persistent inflation will bring economic hardships to lower-income families by decreasing their discretionary spending. “On the flip side, higher-income households will rely on COVID-19 savings to support spending,” she said. “Non-food segments, particularly those big-ticket items, will suffer, with spending volumes falling.”
But Aaron Jodka, National Director of Capital Markets Research with Colliers, noted investment in retail properties has increased in recent quarters. “And buyers are still out there,” he said. “Retail offers relatively higher cap rates when compared to other asset classes. This has kept deal flow moving, as retail is the only asset class with an increase in sales volume quarter-over-quarter in 2022.”