Monday Morning Scoop - Retail Demand Projected to Cool This Year Following Blockbuster 2023

Retail Demand Projected to Cool This Year Following Blockbuster 2023

National shopping center vacancies dropped 10 basis points to reach 5.3% in the fourth quarter of 2023, marking the lowest overall retail vacancy rate since 2007, according to Cushman & Wakefield.

“Shopping centers have shown incredible resilience and adaptability, continuing to attract a diverse range of businesses,” said Barrie Scardina, president of Americas Retail Services.  Scardina cites the surprisingly strong economic growth in 2023 as the reason for healthy demand for retail space.

Net absorption totaled 6.1 million square feet in the fourth quarter. This was up 71% from the previous quarter.

Since the start of the pandemic, lack of new construction has kept shopping center vacancy rates low. In 2023, retail completions slumped to a low of just over 8 million square feet delivered, 20% of which was delivered in the fourth quarter.

In 2023, there were 769 net retail store openings. That was down 50% from the surge in 2022. Yet, it marked the first two-year stretch of net store openings since 2013-2014. These openings were largely represented by discount and grocery stores. However, other segments such as apparel, footwear, luxury, and beauty saw a rebound in store counts, too.

According to Scardina, consumer spending has been largely unconstrained as of now. However, this has the potential to change in 2024 as shoppers are spending more of their budget on essentials – groceries, personal care, and rent. This is leaving less income for items such as furniture, sporting goods, and apparel.

The retail market absorbed 6.1 million square feet of space in the fourth quarter. This was a 33% increase versus the average over the first three quarters of 2023. According to the report, absorption levels are slowing over the longer term.

The waver in absorption is likely due to the lack of shopping center space available to lease. Vacancy rates in many markets are well below historical levels, leaving tenants with fewer options. New retail construction, which has been low since the pandemic, coupled with higher interest rates and less financing options, has led to even greater imbalance in this area.

Due to the tight retail market, asking rents continue to increase. In the fourth quarter, average asking rents were $23.70 per square foot, up 4.1% from the previous year. Asking rents have risen 16.9% from their 2019 levels, with a 41.1% increase over the past decade.

According to Scardina, the outlook for 2024 includes a cooling in retail. Limited space will continue to impact leasing demand and household income growth will slow. In addition, tighter consumer credit and weaker corporate earnings will add to less retail demand in 2024.

“Consumers will be more cautious, and retailers will follow suit,” said Scardina.

By: Kathy Rembisz
Source: GlobeStreet