A multi-speed recovery in retail emerges

Global Real Estate Perspective, November 2021

Global retail markets are recovering at varying rates, subject to each country’s COVID situation, economic conditions and expected return of international visitors. Supported by rising vaccination rates and easing restrictions, trading conditions for a large number of retailers have improved over the third quarter in markets such as the U.S. as well as most of Europe. In contrast, tightened restrictions to contain the spread of COVID across Asia Pacific markets like Australia, Japan, Malaysia and Taiwan have dented consumer sentiment and footfall levels.

Leasing activity continues to pick up in many major retail destinations globally, with prime space highly sought-after in countries with high vaccination rates and eased containment measures. In markets where containment measures have been tightened recently, notably across the Southeast Asia region, many retailers remain concentrated on servicing domestic consumers and opening stores in suburban shopping centers. The recovery in leasing activity continues to lag in markets which are largely dependent on international tourism spending.

Well-capitalized operators are shifting their focus forward and committing to new expansion plans. While some retailers continue to ask for more attractive and flexible lease terms, there are a number of rapidly expanding operators willing to negotiate fixed rents and longer leases in order to secure retail space. As a result of improving sentiment, a handful of markets reported prime rental growth during Q3.

Future trends: Protecting margins key amid disruptions
  • Outlook for 2022: Consumer spending has exceeded expectations in 2021, and most major markets are projected to register continued but slowing growth in retail sales next year. COVID, supply chain disruptions as well as muted international tourism will impact demand in some markets but easing restrictions as vaccination rates increase will continue to spur a recovery in footfall at physical stores while selective retailer expansion activity is anticipated to drive further recovery in leasing volumes across the major cities globally.
  • Long-term: A number of retailers have been able to grow margins in 2021 by reducing inventory and limiting discounting while benefitting from a recovery in consumer demand. Against the background of slowing sales growth, supply chain disruptions, inflation and unwinding of government support measures, the market is anticipating a polarization in financial performance between retailers. Those with a vertically integrated supply chain and omni-channel capabilities are expected to be more flexible and able to adjust operations to changing market conditions, leading to outperformance over the medium to long term.