Consumers are spending, retailers are offering, and low supply is keeping demand for store space high, especially in the most desirable locations, according to a Newmark 3Q 2024 report on retail trends and conditions.
Retail space availability was at a multi-decade low of 5%. Only 5.9 million square feet was delivered in the quarter, keeping conditions tight. And although the 29.3 million square feet leased in the quarter was 33% below the 10-year average, that was due to its scarcity, especially for prime retail assets, the report said. “Retail demand for new space outpaces other CRE sectors,” it noted.
The trend is helped by strong consumer demand, exceeding expectations in September. “The 0.4% sequential increase in total retail and food services sales signals ongoing economic growth, fueled by steady consumer spending,” the report predicted. “Miscellaneous stores led all categories in month-over-month and year-over-year growth, with health and personal care stores also showing strong performance. Food services and drinking places—now representing about 18% of all retail spending when excluding auto, auto parts, and gas—grew just over 1.0% from August, sustaining a year-over-year growth rate of 3.7%.”
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Sought-after open-air neighborhoods, community and strip centers have helped drive demand. So has freestanding retail, especially drive-thrus for quick-service restaurants and fast-casual eateries. Malls, lifestyle centers and outlet centers — which surged in the wake of the pandemic — are now the only retail categories with higher availability than before the pandemic.
The growth of suburban areas has benefited retail in these communities. “For the first time in over a decade, suburban retail assets now show tighter availability than their urban counterparts,” the report stated. It recorded a 50 bps difference between urban and suburban availability and expected growth to further moderate.
In addition, investors are scoping out smaller and tertiary markets such as San Antonio, Grand Rapids and El Paso as well as clusters of smaller markets in Idaho, Montana, Wyoming and Florida – all of which significantly surpassed their 10-year investment sales averages.
A gradual recovery in investor interest in multi-tenant properties is also evident, while volume in freestanding assets continues to decline.
The report predicted a substantial influx of prime centers hitting the market in 2025 would drive investment activity.
The price per square foot is stable, the report noted. “However, the spread between high-quality and lower-quality retail properties continues to widen as many sites are acquired as value-add or opportunistic investments.”
At the same time, the report said a rebound in retail investment volume will not happen before 2025. Actual retail activity remains at 2023 levels, below those achieved in 2021 and 2022. Sales in 3Q 2024 reached 33 million square feet, a low level, at an average price of $206 per square foot and an average cap rate of 7.1%, up 50 bps year over year.
Nevertheless, high construction and build-out costs are discouraging retailers from relocating or opening new stores, enabling landlords to raise rent spreads on new and renewing leases. However, rent growth has moderated due to an increase in available space at underperforming retail centers, the report speculated.
Despite these challenges, the fundamentals of the sector remain strong, Newmark concluded.
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