For the data behind the commentary, download the full Q4 2024 U.S. Retail Report.
Remaining Cautiously Optimistic
The U.S. consumer economic backdrop continues to be favorable for the retail real estate market, but there are challenges that could restrain growth for certain sectors and retailers. Households are generally in a healthy position to maintain recent levels of spending, which will support foot traffic and sales in retail centers. Bolstered by rising employment and real income, consumer confidence has inched higher in the last six months. Many retailers reported positive results over the crucial holiday shopping period, further fueling optimism. As a result, high-performing brands are likely to go forward with store openings in 2025, albeit with a highly intentional and strategic vision given intense competition and the high-cost operating environment.
Tariffs are a key concern for those in consumer-facing industries. With the incoming Trump administration, it seems likely that import tariffs on at least some products entering the U.S. will increase. However, it is too early to know the impact this will have on retailer profit margins or how consumers will respond. As we await more details on the many unknowns regarding trade policy, our baseline expectation is that the macroeconomic environment will remain favorable for retail real estate in 2025.
A Strong Finish for 2024
The national vacancy rate was unchanged in the fourth quarter and remains near a record low at 5.4%. The fourth quarter was the strongest period of the year from a retail demand perspective with 1.4 msf of net absorption nationally, accounting for 89% of the annual total. Absorption was negative in both Q1 and Q3, the latter of which was disrupted by hurricanes and the threat of port labor strikes. While the fourth quarter rebound is encouraging, a more holistic view of 2024 suggests that the market has cooled substantially from 2023, when absorption was 90% higher. The stark deceleration can be attributed to a few factors:
- Economic pressures have led to more store closures and bankruptcies in the retail sector. More than 7,300 retail stores closed in 2024, which was the highest total since 2020. Sector bankruptcies also reached a post-pandemic high and were on par with the 2015-2019 average, as some brands struggled with high debt costs and weaker revenues amid the challenging consumer environment. Widespread closures are concentrated within a few retail categories. Drugstores and home and office retailers, for example, accounted for 35% of closures in 2024, compared to an average of 18% over the past 12 years.
- Absorption has also been limited by the scarcity of available retail space. Even though more storefronts have been vacated, much of that space has been leased by new tenants relatively quickly. The lack of new construction is also contributing to the scarcity; only 8.3 msf of new shopping center space came online in 2024, the lowest level on record after already subdued development since the pandemic.
- Shifts in geographic performance have also limited national demand totals. The South and West regions, which account for two-thirds of the shopping center inventory, each had negative net absorption in 2024 as many markets have an extreme shortage of available space. Of the 11 markets with a vacancy rate below 4%, eight are located in the South region. Nashville, Miami and Raleigh/Durham have vacancy rates below 3%.
These limitations on market expansion are likely to remain in place in 2025. While the economic backdrop remains mostly favorable, consumers are likely to remain discerning with their shopping habits leading to a bifurcated market in which there is a larger gap between outperformers and struggling retailers. Further, the construction pipeline is a non-factor and limited availabilities in the Sunbelt market will prevent a rapid leasing rebound in those markets.
For the data behind the commentary, download the full Q4 2024 U.S. Retail Report.
