For the data behind the commentary, download the full Q1 2024 U.S. Retail Report.
Leasing Activity on Par with Pre-pandemic Averages
U.S. retail real estate started the year where it left off in 2023—with the vacancy rate remaining near historic lows. In the first quarter, the national shopping center vacancy rate was 5.4%, in line with the average over the prior four quarters and among the lowest rates since 2007. Demand decelerated from a rapid pace over the last two years, as overall leasing stepped back, and for the first time since early 2021, net absorption was marginally negative. Lack of new retail construction and limited supply of available space in high quality retail centers has placed a ceiling on the amount of new leasing activity, while increased store closures from several large retail firms also contributed to weaker absorption totals in the first quarter. Nonetheless, the retail market remains in a decidedly stronger place than prior to the pandemic, as consumers and retailers have shown a renewed appreciation for the in-person shopping experience.
Despite a weaker first quarter in terms of space demand, the retail sector’s fundamentals remain healthy due to resilient economic growth thus far in 2024, particularly in the household sector. However, macroeconomic headwinds, including higher interest rates, consumer debt, and the cumulative effects of inflation, are starting to take a toll. Additionally, households are increasingly shifting their consumption patterns to include more travel and consumer services, which benefits shopping centers that cater to those experiences but pressures traditional retailers that rely on discretionary retail spending. These trends are clearly reflected in consumer foot traffic, retail sales and company financial performance—and they are gradually influencing real estate decisions. Through February, real retail sales declined in four of the past five months and were 1.6% lower than a year prior. Still, most of the retail sector remains healthy and in expansion mode. Although there have been more than 1,700 announced retail store closures thus far in 2024, that number has been outpaced by more than 3,000 announced openings, and net store openings are on pace to be positive for the third consecutive year.
Demand Takes a Step Back
The retail market experienced negative net absorption of 1.2 million square feet (msf) in the first quarter, marking the first negative reading since the first quarter of 2021. 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 38.8 msf in 2022, absorption slipped to 19.8 msf in 2023. Looking at demand regionally, the West region experienced the largest retrenchment in the first quarter, totaling negative 1.2 msf of net absorption, led by sizable declines in San Francisco, San Diego, Los Angeles and Seattle. The South region, including Charleston, Palm Beach and Fort Lauderdale, experienced negative net absorption, which was partly offset by modest net occupancy gains in the Midwest and Northeast.
Given the favorable outlook for retail tenant demand, this pullback in absorption is about the lack of 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 the pandemic and has retrenched further in light of higher interest rates and risk aversion by banks and other sources of financing. 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 8.8 msf (0.2% of existing inventory) came online, down from an average of 0.6% per year from 2015-2019. However, the first quarter showed signs of improved deliveries, as completions surged to over 2 msf, up from 1.7 msf in the fourth quarter.
The national shopping center vacancy rate fell 20 bps year-over-year (YOY) to 5.4% in the first quarter. Of the 81 markets tracked by Cushman & Wakefield, 36 exhibited a vacancy rate of 5.0% or lower, with Boston, Raleigh-Durham, Miami and Charlotte having the tightest market conditions. Asking rents continue to increase in response to a tight market. Average asking rents in the fourth quarter were $23.98 per square foot (psf), up 3.9% from a year earlier.
For the data behind the commentary, download the full Q1 2024 U.S. Retail Report.
