Tom Sodoge/Unsplash

Tom Sodoge/Unsplash

The U.S. retail market is changing rapidly, with strong demand, little new supply, and characteristics that seem to change by the hour. If your post-holiday routine included an overstuffed recycling bin filled with cardboard shipping boxes, you’re not alone—a surge in online shopping occurred in 2016, with respectable retail revenue growth overall.

According to the Washington, D.C.–based National Retail Federation, retail sales during November and December 2016 increased 4 percent over 2015 to $658.3 billion—which exceeded forecasts—and $122.9 billion (19 percent) of this was in nonstore sales—a robust 12.6 percent increase over the year before. The holiday season and beginning of the new year brought some bright spots, but also some cause for concern in the retail sector, which, in turn, affects commercial real estate. For example, some household names announced store closures in recent months, while other sectors of the retail world have survived, thrived, and even expanded.

So what does this all mean for commercial real estate, and how can you effectively plan for future retail development? Consider the following themes being revealed in most metropolitan areas around the United States:

Construction is lagging: Deliveries of new-construction retail space have been at historical lows during the 2010s, and while an increase in deliveries has been witnessed in 2015 and 2016, the new inventory is far below historical (30-year) annual averages of growth in many U.S. metro areas.

Demand is greater than supply: Positive absorption is now outpacing deliveries in most markets, reversing a trend in which new deliveries far exceeded lease-up activity during the Great Recession.

No space, stable/rising rents: Vacancy rates are decreasing, though lease rates are stable in most markets (except more expensive coastal metro areas, which are also experiencing rent growth).

Food and health are driving growth: Expanding sectors include dining (particularly fast food with drive-through and informal counter service), food stores (health food markets, specialty/ethnic markets, and supermarkets), and gyms/specialty fitness facilities in particular.

Department stores are declining: Contracting sectors include select department stores and big-box retailers: Sport Chalet and Sports Authority both filed bankruptcy, closing a combined 490 stores in 2016; Macy’s plans to close 68 of its 750 department stores in 2017; and Kmart/Sears plans to close 150 stores in the near term as select storefronts undergo a real estate liquidation process. Some of these closures will result in increased vacancy, while others will disappear from the retail inventory altogether as the space is adapted or redeveloped to other uses.

Big-box retail is diversifying: Successful big-box retailers are differentiating themselves from online competition. For example, Best Buy is trying to combat the trend of consumers “showrooming” their stores—trying on products but then purchasing them online for a lower price by 1) price matching their products and 2) focusing on big-ticket items such as household appliances that are often more a need rather than a want and cannot be shipped from an online retailer quickly or inexpensively.

In fact, Best Buy increased its share of showroom space to accommodate large appliances, and during the 2016 holiday season had sales growth in health and wearables, home theater, and major appliances (along with “significant declines” in mobile phones, tablets, and digital imaging), according to its latest financial report. Furthermore, Dick’s Sporting Goods, Cabela’s, and Bass Pro Shops have succeeded in the sporting goods sector by offering product demonstrations and interactive/virtual-reality experiences that are fun for the consumer, and a big value-add versus online shopping.

Finally, Amazon has entered the brick-and-mortar world with Amazon Books stores in select markets (Seattle; Portland, Oregon; and San Diego), which not only sells their books and showcases their latest media gadgets, but also serves as a pick-up spot for those who have purchased online. Amazon has plans for eight more of these stores.

Collectively, these trends highlight the rapidly changing landscape faced by today’s retailers and commercial developers.

Shane McCutcheon is a senior manager with Meyers Research LLC, specializing in real estate market analysis and financial feasibility for commercial and residential consulting assignments across the United States, with a concentration in the American Southwest and Mexico.