NEWS | RESEARCH
Q3 2023 White Paper
Supply Side Constraints Stabilize Brick & Mortar Retail.
Despite challenging economic conditions, brick and mortar retail posted positive net absorption and experienced positive rent growth in Q3 2023 amidst low new construction deliveries. Economic reports indicate that consumer spending boosted GDP growth between July-August, but also project a slowdown in the Fourth Quarter as higher energy prices and interest rates take their toll. Nevertheless, the consensus is that brick and mortar retail is well-positioned to weather such turbulence and is poised for long term stability and growth – particularly in the necessity-based segment.
Net Absorption 9.8 Million SF; Availability Rate 4.8%
According to CBRE Research, net absorption hit 9.8 million square feet in Q3 2023, a 34% increase quarter-over-quarter. This resulted in an availability rate of 4.8%, an 18-year low. The “street retail, freestanding & other” segment accounted for 43.9% of this net absorption, with 4.3 million square feet. While net absorption for “neighborhood, community and strip centers” fell by 29% quarter-over-quarter, this may have been due to the lack of available space in this product segment, as vacancy dropped by 50 basis points to 6.6%. According to Cushman & Wakefield, in the Washington, D.C. MSA, net absorption in Q3 2023 totaled 237,337 square feet, compared to 241,779 square feet in Q3 2022. Vacancy in the Washington, D.C. MSA stood at 4.5% at quarter end, compared to 5.3% in Q3 2022.
ABSORPTION PICKS UP IN Q3
Q3 2023 Completions 5.6 MM; 50.0 Million SF Year-Over-Year
According to CBRE Research, total new retail space delivered in Q3 2023 fell by 28% quarter-over-quarter to just under 5.6 million square feet, the second-lowest total on record. A record low 50.0 million square feet was delivered nationwide in the last year, per Lee & Associates. High construction costs, higher interest rates and the lack of construction debt financing likely all contributed to this trend. Cushman & Wakefield notes that in the Washington, D.C. MSA, 165,767 square feet of retail was delivered in Q3 2023 and that just 372,009 square feet was under construction.
RETAIL CONSTRUCTION COMPLETIONS FALL IN Q3
Rent Growth Continues to Increase, Albeit at a Slower Rate
CBRE Research indicates that asking rent growth fell to just over a positive 2.1% on a year-over-year basis (Lee & Associates cites 3.5% year-over-year), down by 23 basis points from the previous quarter and 40 basis points from Q3 2022. The overall average asking rental rate reached $23.42 per square foot nationwide. According to Cushman & Wakefield, the average asking rental rate in the Washington, D.C. MSA was $32.33 per square foot, up from $30.88 per square foot in Q3 2022.
ASKING RENT GROWTH SLOWS
Continued rent growth seems to be generated by the low supply of available space, with the most leasing activity concentrated in spaces smaller than 3,000 square feet and driven by the growth of quick-service restaurants. Demand for medium and larger spaces has been driven primarily by discounters like Dollar Tree, Dollar General, TJ Maxx, Burlington and Ross. Demand for spaces larger than 10,000 square feet increasingly has come from fitness and experiential tenants.
As noted in recent Wall Street Journal and Washington Post articles, consumer spending contributed significantly to economic growth in Q3 2023. Wealthy Americans, in particular, continue to make discretionary purchases in addition to boosting travel and hotel stays. This has led to luxury tenants expanding their national footprints and seeking locations in new markets. Notwithstanding the foregoing, trends seem to indicate a pending slowdown for the balance of the year. According to Placer.ai, retail traffic declined in Q3 2023, and with the exception of movie theaters (bolstered by the movies Barbie and Oppenheimer) became more concentrated toward necessity-based retail and discount stores. Placer.ai notes that trip statistics indicate longer visits to grocery and discount stores, exhibiting a continued preference for “mission driven” shopping, where consumers adopt a more strategic approach to outings and lengthen median visit duration.
Retail Presents an Investment Opportunity
Despite the evident supply side constraint and positive longer-term outlook, brick and mortar retail continues to attract minimum interest from institutional investors. According to James Nelson of Avison Young, retail has accounted for 0.3% of total investment activity in the past year and holds a 1.6% share of sector specific dry powder (approximately $723 million of $45.2 billion). This suggests to SageTrust Properties that the opportunity exists to purchase neighborhood shopping center properties at attractive pricing in the absence of competition from institutional buyers – particularly in the opportunistic/value add space. This is the focus of the company’s activities.