Despite recession concerns and major retail bankruptcies, the U.S. retail real estate market thrived in Q2 2023. According to Cushman & Wakefield, the national vacancy rate dropped to 5.4%, a 60 basis points decrease from the previous year and 80 basis points lower than pre-pandemic levels. This marked the ninth consecutive quarter of declining vacancy since early 2021. The South led with the tightest vacancy at 4.9%, while Raleigh/Durham, Nashville, and Miami stood out with sub-3% vacancy rates. Other low vacancy rates were observed in Columbus, Boston, and Salt Lake City. A commercial real estate agent should be able to be familar with the data and help you understand the market.
Physical Store Demand Is Still High
Driven by the increasing demand for physical stores, the U.S. retail market continued its positive momentum in the second quarter, leasing more new space than it vacated for the ninth consecutive quarter. This resulted in a substantial total absorption of 7.1 million square feet, marking a significant surge from 2.6 million square feet in the first quarter and just shy of the total absorption for the entire previous year. For commercial real estate agents, this trend highlights potential investment opportunities in the retail sector. The top five cities experiencing the most new retail space absorption in Q2 were Chicago (1.3 million sq. ft.), Dallas/Fort Worth (1.3 million sq. ft.), Phoenix (441,000 sq. ft.), Norfolk, Virginia (386,000 sq. ft.), and Atlanta (382,000 sq. ft.).
Rising Rents Fueled by Limited New Supply.
Limited new supply continues to drive the increase in rents, with U.S. retail rents averaging $23.47 per square foot in Q2, marking a 4.7% year-over-year rise. Since 2019, asking rents have seen a cumulative 16% increase.
Potential Market Moderation Expected in 2024.
Despite the strong performance of the retail real estate market in 2023, analysts predict a slowdown in the coming years. Barrie Scardina, executive managing director and head of retail services for Cushman & Wakefield in the Americas, highlighted the industry’s challenges, including pandemic closures, rising operating costs, and supply disruptions. Despite these hurdles, the retail sector has consistently recovered and improved. However, due to factors like reduced consumer spending and tighter financial conditions, analysts anticipate a slowdown in demand for physical stores in strategic locations. Consequently, expansion plans may proceed with greater caution, and struggling brands could consider consolidation. While no explicit signs indicate an immediate end to the current trend, conditions are expected to moderate in the near future.
June 2023 saw higher consumer spending on dining out compared to June 2022.
June, the food and beverage service businesses saw a significant boost in sales, climbing by 8.4% compared to the previous year, as per the U.S. Department of Commerce data. This growth outpaced the overall retail sales (excluding auto and gas), which increased by 3% during the same period.When it comes to individual retail sectors, health and personal care shops stood out with an impressive 6.3% increase in sales. Additionally, miscellaneous store retailers and food and beverage retailers also had reason to celebrate, as their sales saw positive growth, rising by 1.5% and 1.3%, respectively.