Through Q2 2024, U.S. retail sales continued to increase year-over-year, despite clear signs that consumer sentiment is weakening. Shopping center landlords benefitted by a scarcity of vacant space, as tenants competed for availabilities in competitive properties, leading to rent increases. Investors continue to recognize the appeal of retail real estate, especially projects that promise steady cash flow.
Retail Sales Up But the Consumer is Tapped Out
According to the U.S. Census Bureau, retail sales for the first half of the year were up 2.8% year-over-year. This increase was especially dependent upon Mother’s Day and Memorial Day holiday purchases, as April’s figures (without Easter this year) showed negative growth. Consumers are increasingly reliant upon personal savings and credit card debt to finance purchases. The cooling labor market/slower wage growth, the winnowing of excess savings, and the rise of credit card debt all have impacted consumers’ spending. According to Jim Baird, the CIO of Plante Moran Financial Advisors, “The combination of the three has left most households with less ability to spend freely, and a greater focus on budgeting effectively. All of this points to a tougher retail environment, especially for discretionary items.” Per Placer.ai, overall retail foot traffic remained elevated through Q2 2024 and open air shopping center visits now surpass pre-Pandemic levels. Traffic at discount/dollar stores, grocery chains, fitness clubs, superstores and restaurants were up, with restaurants exceeding Q2 2023 levels. According to Lee & Associates, food-and-beverage sector tenants accounted for 20% of all First Half 2024 leasing activity, overwhelmingly driven by the growth of fast-casual, coffee and quick-serve concepts. Meanwhile, traffic and sales at furniture stores, building supply dealers and hobby and sporting goods retailers were down. Multiple media outlets noted that luxury retailers have lost aspirational shoppers (who historically have accounted for 50% of sales), with Gucci, Burberry, YSL and others reporting lower sales and earnings. Hermes, Louis Vuitton, Hermes and others have become increasingly dependent upon their affluent customers. As noted by Rebecca Rockey, Deputy Chief Economist and Global Head of Forecasting for Cushman & Wakefield, “Cracks are forming beneath the surface, as consumers and businesses remain under pressure from the cumulative effects of high interest rates and inflation.”
NEWS | RESEARCH
Q2 2024 White Paper
Is Retail the “Goldilocks” Asset Class?
SHOPPING CENTER VISITS SURPASS PRE-PANDEMIC LEVELS
In this environment, landlords and tenants alike recognize the importance of appealing to the needs and challenges of the consumer. As Prism Places Founder and CEO Stenn Parton notes, “We are in the business of competing for people’s time and money every day. It is a relentless pursuit, every day, to create an experience where your customers and guests actually want to show up.” Similar sentiments have been expressed by U.S. grocers, who have fought for consumers’ share of wallet amidst economic uncertainty. Although food-at-home inflation has fallen below the Fed’s 2% inflation target, grocers increasingly have emphasized private label brand products at lower price points. Those chains that have experienced the most rapid growth, including Aldi’s and Trader Joe’s, offer limited assortments at budget prices and superior customer service, breeding customer loyalty and increasing sales. Aldi, in particular, has taken advantage of its strategic positioning to grow aggressively, adding 109 stores in 2023 and acquiring the Winn-Dixie and Harvey Supermarket chains last year.
Supply Side Constraints Lead to Landlord Favorable Leasing Environment But Also a Cap on Growth
During the Second Quarter 2024, shopping centers’ supply side constraints dominated news from national and international media outlets and research firms. JLL reported that 155 million square feet of mostly aging retail space was demolished over the past five years. New space has not kept pace. Cushman & Wakefield notes that only 9.8 million square feet was delivered in 2023 (0.2% of existing inventory) and only 11.3 million square feet remains under construction. According to CoStar National Director of U.S. Retail Analytics Brandon Svec, “First and foremost, we stopped building, really since the Great Financial Criss, with retail construction falling off by two-thirds since then. That’s been a big part of it. We’ve also demolished space.” Although U.S. retailers are on track to open more stores than they close this year, planned store openings are trending four percent lower than last year. According to CoreSight CEO Deborah Weinswig, “People aren’t announcing openings because there’s nowhere to open.” More space is not projected to be delivered until at least 2027.
Landlords and their brokers are benefitting from the scarcity of space as tenants compete for availabilities and have been willing to pay higher rents and higher rent escalations. Rents are at an all-time high at $24.37 per square foot nationally, with rent growth expected to be 2.9% between 2024 – 2026. According to CoStar News, the average time from when a space becomes available to securing a tenant has declined to 8.5 months, the quickest pace recorded in over two decades. Over 80% of retail space listed on the market is leased within six months after first becoming available. Fifty percent of all retail space lands a tenants within three months after first becoming available.
AVERAGE TIME FOR RETAIL SPACE TO LEASE HITS DECADE LOW
Adding to the competitive landscape, more types of tenants are competing for space. According to James Bohnaker, Senior Economist for Cushman & Wakefield, “The tenant mix continues to diversify, limiting the downside risk of sector-specific weakness. Beyond traditional retailers, consumer service providers – including restaurants, education/healthcare, beauty and wellness – are leasing more space in retail centers.”
Not so long ago, landlords were concerned about how they would fill vacancies resulting from tenant bankruptcies. Given the scarcity of space in quality centers, store closures increasingly are seen as opportunities. According to Conor Flynn, Kimco Realty’s Chief Executive, “It’s a nice time to be getting spaces back because you have the ability to pick a best-in-class retailer.”
Net Absorption to Slow in 2024, Partially Due to Supply-Side Constraints
Net absorption during Q2 2024 was estimated to be 1.4 million square feet, bringing the year-to-date total to 834,000 square feet. After peaking at 39 million square feet in 2022 and yielding 18.9 million square feet in 2023, 2024 is projected to have the weakest net absorption since 2020.
SHOPPING CENTER NET ABSORPTION
With that said, according to Cushman & Wakefield, the open-air retail availability rate at the end of Q2 2024 stood at 5.3%, slightly down from the Q1 2024 vacancy rate of 5.4%. (Lee & Associates estimates national retail vacancy at 4.1%, the same as for Q1 2024). Cushman & Wakefield projects that vacancy rates will rise to the 6.0% range in 2025, and it also indicates that asking rents averaged $24.37 at the end of Q2 2024, up 3.8% year-over-year.
OVERALL VACANCY AND ASKING RENT
Based upon data presented by Cushman & Wakefield, Washington, D.C. metro area retail trends are slightly stronger than national figures, with the metropolitan area open-air retail center Q2 2024 vacancy rate at 4.4%, with 603,844 square feet under construction and an in-place inventory of 124.1 million square feet (Lee & Associates estimates Q2 D.C. retail vacancy at 4.3%, with 1.2 million square feet under construction and an in-place inventory of 271.7 million square feet). Cushman & Wakefield reports 152,103 square feet of positive net absorption through Q2 2024 for open-air retail.
Current Investment Climate Favors Retail
According to multiple research sources, retail compares favorably relative to other real estate product types. The resiliency and predictability of retail property cash flows are not lost on industry experts, who also note that retail’s supply side constraints bode well for the foreseeable future. According to CBRE, retail investments represent a “Goldilocks story,” with strong fundamentals and positive leverage making retail investments attractive for savvy investors. Blackstone Senior Managing Director Andrea Drasites was quoted at the World Retail Congress in April, “The headline is that it’s going to be an interesting year to invest in retail real estate. There is a bifurcation of convenience and luxury, with the middle really suffering, which is a theme I think will continue. Scale will be a benefit, but the market is not for the faint of heart.”
Retail CMBS has improved in a number of metrics. Although the balance of retail loans has remained relatively flat (Retail remains the third-largest securitized asset class), the distress metrics have improved monthly year-to-date.
Stability also characterizes investment sales. According to Altus Group’s Commercial Real Estate Industry Conditions & Sentiment Survey for Q2 2024 – 83% of respondents felt retail investment opportunities were fairly priced. Respondents ranked Retail third behind Industrial and Multifamily in terms of next epxectations to the query, “Rank which property types you expect to be the best and worst performing in the next 12 months.”
RANK WHICH PROPERTY TYPES YOU EXPECT TO BE THE BEST AND WORST PERFORMING IN THE NEXT 12 MONTHS
SageTrust Properties is actively in the market to source retail open-air property acquisition opportunities and has the capability to manage its assets. Let us know if you would like to schedule a meeting with us to discuss your needs and our capabilities further.