Year in Review: Real Estate in 2023 and Beyond

Franchisors and franchisees alike continued their post-pandemic evolution in 2023 under the ongoing influence of economic headwinds, global unrest, and the dwindling reserves of “pandemic savings.”

One consistent trend is the increased consumer demand for off-price and discount retailers. In 2023, we saw luxury retailers try to recapture market share and profit margins by employing more strategic sale schedules, revising return policies, and embracing omnichannel retail experiences (a seamless integration of online and physical shopping experiences which, for example, enables a customer to explore products online, check inventory with an app, and then purchase in-store).

As we look toward 2024, businesses must continue to align with evolving consumer behaviors. It will be interesting to see which companies figure out how to capitalize on the recent growth of “medtail,” where healthcare services such as urgent care or medical spas occupy ground-floor spaces in retail centers along with more traditional retailers and restaurants.

Mergers, closures, and expansions

This year saw significant changes in the grocery sector. Major mergers, such as Kroger-Albertsons and Aldi’s acquisition of Winn-Dixie and Harveys, will reshape competitive dynamics and influence grocery-anchored shopping centers across the world.

On the flip side, the closure of major retail chains, including those in the drugstore sector, while increasing vacancies, will open curious opportunities for retailers to backfill these hard-to-utilize 10,000–15,000 s.f. building shells. Opportunities such as this highlight the importance of an agile and creative real estate strategy.

Adapting to consumer trends and market shifts

In response to evolving consumer preferences, real estate strategies in the franchise world continued to adapt in 2023. The prevalence of ghost kitchens, pop-up stores, multifunctional physical spaces, and more recently, artificial intelligence were all a part of this ongoing adaptation.

An example of recent AI integration comes from Wendy’s newest technology, FreshAI. Powered by Google’s large language models, this system pairs an AI-powered voice experience with a visual order display on a digital menu board and aims to “revolutionize” the drive-thru experience. By improving service speed—with some test sites showing 22 seconds faster service times—and boasting an accuracy rate nearing 99%—FreshAI demonstrates how AI can optimize efficiency while maintaining quality. This platform isn’t just about speed; it’s about understanding customer conversations and managing complex customizations, showcasing how AI can be tailored to specific retail needs.

The power of youth

A critical trend not novel to 2023, is the focus on engaging younger demographics, particularly Gen Z and Millennials. These groups, being digital natives, are driving retailers to adopt a digital-first approach, which involves not just a strong online presence, but also an integration of digital experiences into physical stores. Franchises are leveraging social media platforms, augmented reality, and personalized online experiences to connect with these younger audiences.

The challenge for retailers in 2024 will be to create an omnichannel experience that resonates with these tech-savvy consumers, blending digital interactivity with the authenticity and engagement of physical retail spaces.

Economic recap and projections

One thing everyone can agree on is that 2023 was characterized by interest rate instability and a cautious lending environment. Thankfully, recent economic projections from the Federal Reserve signal an end to the historic tightening of U.S. monetary policy over the last 2 years, with expectations of lower borrowing costs emerging for 2024. This shift is underscored by the Federal Open Market Committee’s dovish stance, suggesting that the cycle of rate hikes is over unless significant economic surprises occur. The potential for increased liquidity in 2024 could aid transaction velocity.

2024: Onward and upward

2024 heralds a year where flexibility, innovation, and a keen understanding of market and technological trends will be crucial. The projected stability in interest rates and lower borrowing costs could unlock new possibilities for franchise development, enhancing the scope for franchising in untapped markets and sectors. For franchises across the spectrum, it’s an opportunity to redefine their strategies, ensuring they remain competitive and relevant in today’s unpredictable world, which includes not only AI’s potential threat to humanity but humanity’s threat to humanity.

Jason Fefer is an associate director of Marcus & Millichap’s Net Leased Property Group on a large team alongside his partners Robert Narchi and Tyler Bindi. They structure sale-leasebacks and negotiate leases on behalf of some of the largest franchisees across all sectors including the restaurant, automotive, and retail space. He can be reached at 818-669-2388 or jason.fefer@marcusmillichap.com.