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Retail sales still growing, keeping demand for real estate strong

Lack of desirable space holds back leasing activity while boosting rents

Looming recession? What looming recession?

Despite growing fears that a downturn may be pending in the first half of next year, retail sales gained steam in the months leading up to the holiday season, according to JLL’s Q3 2023 Retail Outlook report. Retail sales grew for the sixth consecutive month in September, rising by 0.7%, according to data from the commercial real estate service company.

Subsequently, retail real estate demand remains consistent with levels seen during the first half of this year. Retailers are grappling with higher operational costs due to inflation, a lack of labor and ever-present, elevated interest rates. But thus far, the largest headwind to leasing activity has been a lack of available space in prime locations.

JLL described the shortage of space as “significant,” considering that 145 million square feet of retail space has been demolished in the past five years and high building costs continues to hold back construction. Deliveries fell 30.4% quarter over quarter to stay near historic lows. Availability in the sector, per JLL, is nearly 200 basis points below its historic average of 6.8%, and is not expected to see meaningful improvement in the coming year given the slowdown in construction and a projected increase in teardowns of obsolete space.

Market rents are still on the upswing as a result, although rent growth is moderating from its high points logged last year. The strongest rent growth is still concentrated in the Sun Belt states, where space for midsized boxes and outparcels is hard to find.

Retail deal volume, however, remains muted. Outside of entity-level activity, capital markets were essentially flat between the second and third quarters. JLL’s early estimate of Q3 transaction volume (excluding entity-level deals) was approximately $9.9 billion, down slightly quarter over quarter and a whopping 40% decrease compared to third-quarter 2022.

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