Guest view: The renaissance of necessity retail real estate

The necessity retail sector continues to demonstrate remarkable resilience in today’s dynamic market environment. Across global markets, assets anchored by grocery, discount retail, health & wellness and essential services have maintained strong performance metrics despite shifting consumer preferences and economic headwinds. 

This resilience is particularly evident in suburban locations, where retailers are actively expanding their footprint to meet growing consumer demand for convenient, accessible retail options.

What makes necessity retail work?

Nuveen Real Estate’s research indicates that successful necessity retail investments share three fundamental characteristics: strategic locations in areas with favourable demographic trends, the ability to attract and retain best-in-class tenancy and demonstrated sustainable traffic patterns resulting from market dominance within their respective trade areas.

Our investment strategy prioritises assets that generate frequent consumer visits – typically two to three times weekly – and enable multiple-purpose shopping trips. These properties present opportunities for value creation through strategic tenant mix optimisation, capture of accretive rent spreads, credit enhancement and thoughtful activation of void space with in-demand retailers.

Evolution of consumer behaviour

Consumer behaviour has undergone significant evolution, shaped by post-pandemic suburbanisation trends, increased work-from-home adoption, and value-seeking behaviour in response to inflationary pressures. Uncertain job security and the broader economic environment are expected to sustain this focus on necessity retail categories, benefiting neighborhood centres. In the UK, footfall at retail parks which often service necessity retail and located close to residential neighbourhoods continues to grow post-pandemic with growth exceeding that of malls and high streets.

Consumer health varies but shows overall strength across major markets. European consumers maintain strong balance sheets, with savings rates approximately 200 basis points above long-term averages. Market analysts anticipate positive impacts from declining interest rates, fall in savings ratio and project spending growth across major European markets.

Minimal supply risk

The decline in investor interest in the retail sector has led to a significant reduction in new retail developments. Rising development costs, driven by increased material and labour expenses, have further constrained new supply. This limited supply supports stable retail rents, particularly for well-managed retail assets located in large residential catchment area. Retailers increasingly prioritise these high-performing retail properties due to their ability to attract consistent foot traffic.

How digital integration is reshaping physical retail

The e-commerce narrative has evolved significantly from its initial perception as a threat to physical retail. Today rising fulfilment costs will impact retailer profitability and in-store fulfillment has become a cost-effective method of distribution. Digital commerce now serves as a complementary channel that enhances brick-and-mortar operations. Industry data suggests that click-and-collect facilities in major European markets – including France, the UK and Germany – are projected to grow at c.20% annually through 2033.

This integration of physical and digital retail has strengthened the position of well located necessity retail assets.

Europe’s quiet comeback

European markets show promise with minimal new supply and increased occupier demand. In terms of performance, the UK market led the way with shopping centers and retail warehouses outperforming the broader property sector by more than 300 basis points in 2024 as recorded by MSCI. Investors are increasingly attracted to higher income yields that can be delivered for necessity style retail formats considered as retail parks. Retail parks have delivered particularly strong and diversified income returns, averaging 6% over the past decade according to MSCI data.

The smart money: where investors are finding value

Current market conditions present an attractive entry points for investors, with pricing adjustments creating compelling value propositions. Strong yield spreads versus other sectors, combined with defensive income characteristics, make necessity retail an increasingly attractive component of diversified real estate portfolios. However, investors must carefully consider market-specific regulatory environments, interest rate sensitivity, tenant credit quality, and growing ESG compliance requirements.

Why necessity retail is here to stay

Looking ahead, Nuveen Real Estate maintains a positive outlook for necessity retail assets. This conviction is grounded in sustained consumer demand for essential goods and services, limited new supply, growing retailer expansion plans in suburban markets, and attractive risk-adjusted return potential. The sector’s demonstrated resilience through economic cycles, combined with its ability to adapt to changing consumer preferences, positions it well for continued strong performance.

As the retail landscape continues to evolve, necessity retail assets that emphasise convenience, essential services, and community connection will likely continue to outperform. These properties represent not just retail locations, but critical infrastructure serving the daily needs of their surrounding communities –a characteristic that underpins their enduring value proposition for institutional investors.

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