Resilient retail sector sees vacancies fall further during second quarter

Can sector continue remarkable post-COVID recovery amid choppy economic waters?

The retail real estate market defied a turbulent U.S. economy and continued a remarkable rebound by gaining momentum in the second quarter of 2023, according to a recently released report from Cushman & Wakefield.

The national retail vacancy rate fell by 60 basis points year over year to 5.4% during the three-month period, the lowest rate since Cushman & Wakefield began tracking the metric in 2007. Moreover, the vacancy rate was down 80 basis points from the pre-pandemic figure as strong demand caused new leases to surge and continued to propel occupancy upward.

Some 7.1 million square feet (msf) of positive net absorption was realized from April through June, marking a ninth straight quarter of absorption growth. The rate of absorption climbed as well, jumping from 2.6 msf in the prior quarter. Large markets in the West lagged, with Los Angeles; Orange County, California; Seattle; and Salt Lake City experiencing negative absorption during the period. But 57 of the 81 markets tracked by Cushman & Wakefield saw positive net absorption, led by Chicago (1.28 msf), Dallas (713,000) and Phoenix (441,000).

The diminishing vacancy rate has been helped by a stagnation of supply as new retail construction stayed subdued in the second quarter. Only 2 msf feet of new space was delivered across the country, with a total of 4 msf coming onto the market during the first half of this year. Six months in, 2023 is on pace to set another all-time low in completions, one year after a low-water mark of 9.8 msf was recorded. The shortage likely will continue to pose a challenge in undersupplied markets, where limited financing options and higher costs for capital are likely to prevent a quick inventory rebound, Cushman & Wakefield posited.

The lack of available space has led to an uptick in asking rents, which have now cumulatively grown by 16% from where they were in 2019. Per-square-foot asking rents were at $23.47 during the second quarter, up 4.7% year over year. New supply isn’t set to jump anytime soon, Cushman & Wakefield noted, potentially giving landlords more runway to further increase rents.

Moving forward, the big question surrounding demand involves a potential looming downturn. Will retailers’ expansion plans stay assertive with a recession still in the cards? Year-to-date announcements suggest that 2023 is on track for a net gain in store openings, a positive sign one year after the metric moved into positive territory for the first time since 2016. But retailers need to be cautious of a pullback in consumer spending if the economy goes south, particularly with consumer sentiment and real income “already on shaky ground,” as Cushman & Wakefield put it.


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