For the data behind the commentary, download the full Q2 2024 U.S. Retail Report.
Resilient Retail Market Starts with Consumers
The U.S. economy continues to defy predictions of a recession in 2024, thanks in large part to the resilience of consumer spending. Through May, real personal consumption expenditures (which strips out the impact of inflation) rose 2.4% from a year ago, which is slightly stronger than the annual average for 2023. Healthy spending is underpinned by increases in real disposable personal income, which rose 1.1% over the past year.
The implication of spending outpacing income growth is that consumers are relying more on savings and credit to finance purchases—the personal saving rate averaged 3.7% over the last six months, or about half of the 2019 rate. Meanwhile, credit card usage is at an all-time high and delinquencies for some cohorts are rising. These trends are not concerning over a short period of time, but should ultimately result in softer spending as household budgets become more constrained.
Consumers have been adapting to adverse financial conditions for some time, and trends in the retail CRE market reflect these tendencies. Amid higher prices, shoppers have been gravitating toward discount offerings to stretch their budgets further, which helps explain why nearly one-third of planned retail store openings this year are discount retailers.1
Absorption on Track for Lackluster Year
The retail market experienced net absorption of 1.4 million square feet (msf) in the second quarter, bouncing back from its first negative reading in three years in Q1 2024. While we should not put too much stock into a single quarter, it’s safe to say that occupier sentiment is cooling. After peaking at 39 msf in 2022, absorption slipped to 18.9 msf in 2023 and is now at 834,000 sf year-to-date—which is on pace for the weakest year since 2020. Looking at demand regionally, the South accounted for more than three-quarters of the quarter-over-quarter (QOQ) improvement, with Dallas/Ft. Worth (+568,000 sf), Austin (+255,000 sf), Jacksonville (+257,000 sf) and Fort Myers/Naples (+215,000 sf) leading the region. Elsewhere, Phoenix (+380,000 sf), Chicago (+310,000 sf) and New York City Metro (+232,000 sf) recorded the strongest absorption. The West region had negative net absorption for the second consecutive quarter, with less than half of the region’s markets seeing positive demand.
Lack of Supply Will Keep Availability Tight
The pullback in absorption compared to last year is partly due to the limited shopping center space available to lease. With vacancy rates in many markets already well below historical norms, tenants are increasingly left with fewer suitable options in which to locate. New retail construction has been minimal since 2020 and has retrenched further in light of higher interest rates and other financing challenges. For the first time in years, the retail market is at a point of being supply constrained—at least for space in quality shopping centers. Last year set a new low for retail construction as only 9.8 msf (0.2% of existing inventory) came online, down from an average of 0.6% per year from 2015-2019. Currently, there is only 11.4 msf of retail space under construction, so new supply will remain paltry for the next several years. The national shopping center vacancy rate held steady at 5.3% for the third consecutive quarter, which is the lowest on record since our data begin in 2007. Of the 81 markets tracked by Cushman & Wakefield, 10 exhibited a vacancy rate of 3.5% or lower, with eight of them located in the South. Nashville, Raleigh-Durham, Sarasota, Miami and Charlotte have the tightest market conditions nationally. Asking rents continue to increase in response to a tight market. Average asking rents in the second quarter were $24.37 per square foot (psf), up 3.8% from a year earlier.
For the data behind the commentary, download the full Q2 2024 U.S. Retail Report.
1 Coresight Research
