Retail Sales Up With a Consumer Focus on Value

According to the U.S. Department of Commerce, retail consumer sales increased 0.9% between January and February 2024, and 0.7% between February and March 2024 – far ahead of analysts’ expectations. As a result, retail spending increased month-over-month in seven of the past 10 months through March. According to CNN, online sales and gas station purchases led with 2.7% and 2.1% increases, respectively, followed by specialty stores, groceries and restaurants and bars. Meanwhile, sales of electronics, clothes and sporting goods fell.

Increased credit card spending (and increased credit card delinquencies) were offset by continued job growth, low unemployment and wage growth; however, consumers remain keen for discounts and prioritize dining out over acquiring goods, per GlobalData Managing Director Neil Saunders. According to National Retail Federation President and CEO Matthew Shay, “As inflation for goods levels off, March’s data demonstrates steady spending by value-focused consumers who continue to benefit from a strong labor market and real wage gains.” The Philadelphia Fed said people are trading down and buying cheaper items, and the Atlanta Fed commented that shoppers are price-sensitive and doing less discretionary buying. These sentiments are echoed by data provided by Placer.ai on consumer trends. Placer.ai concludes that discount and dollar stores are gaining market share at the expense of superstores; convenience stores are becoming dining destinations; and quick serve restaurants that cater to larger households are seeing visit growth.

Supply Side Constraints and Operational Focus Lead to Resurgence for Retail Brick and Mortar

During the First Quarter 2024, numerous media outlets reported on the improving fortunes of brick and mortar retail, given the lack of new supply, the closure of many B and C-quality properties and landlords’ commitment toward capital investment, building co-tenancy, public space programming and improving operations. Visitation across property types continued to return to pre-COVID levels and experiential retail, in particular, has been key to driving traffic. According to Placer.ai, fitness and dining/entertainment options continued to experience significant growth. Luxury tenants also performed strongly and have expanded their national footprints to the suburbs and to Sunbelt markets where they traditionally did not have as strong of a presence.

According to Cushman & Wakefield, year-to-date there have been more than 3,000 announced new store openings. At the same time, some retail chains announced steps to curb and reduce their footprint after years of aggressive growth – Cushman & Wakefield reports more than 1,700 announced store closures year-to-date. This is partially due to supply-side constraints and the lack of attractive space at affordable rents; however, tenants’ financial condition also has played a role. Of particular note, Dollar Tree and Family Dollar (which is owned by Dollar Tree) announced the closure of 1,000 stores and a renewed emphasis to improve remaining stores’ physical condition and customer service. In addition, 99 Cents Only Stores filed for Chapter 11 bankruptcy protection and liquidiation, closing 370 stores. This contrasts with competitor Dollar General, which recently celebrated the opening of its 20,000th store and continues to experience strong revenue growth and profitability. Dollar General stores generally are found in more rural areas, where they experience less competition from superstores and other concepts.

Net Absorption to Slow in 2024, Partially Due to Supply-Side Constraints

Net absorption of retail space is expected to fall to 28 million square feet in 2024 from 35 million square feet in 2023; however, only 14 million square feet of new multi-tenant retail space is scheduled for delivery in 2024, half of the projected demand. The dearth of new construction amidst improving fundamentals has been driven by high construction costs and interest rates and the lack of construction financing. According to CBRE, retail construction costs increased by 6.5% in 2023 and are expected to increase further in 2024, albeit at a slower rate.