Retail has generally seemed to hold out through many of the trials facing CRE, in general. Right now, some data from Newmark might leave you confused about what is happening now.
First is current economic conditions. As the firm noted, consumer wage growth is outpacing inflation. In the November jobs report, average hourly earnings were up 4% year over year. The Consumer Price Index in October, though, experienced 3.3% year-over-year growth. But an average view doesn’t get to the core of distribution.
Consumer confidence remains subdued, as Newmark said. Here’s why. Wages have been growing about 10% faster than inflation at the 75th percentile. At the median, it’s slightly below CPI. And at the 25th percentile, it’s about a 5% annual loss, according to data from the Federal Reserve Bank of Atlanta. There may not be enough people at the top to keep the GDP, which is 69% consumer spending, as strong as it has been. Retail sales growth has continued to be positive but for a year it’s been below 5%, which was largely the pattern between 2012 up to the end of 2019. Newmark did point out that the continued strength was “particularly notable” given how much fuel prices, which are counted in the retail mix, had fallen since a 2022 peak.
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Retail capital markets have stayed “subdued”; only 33 million square feet traded in the third quarter of this year. While prices are stable, the gap between high-quality and low-quality properties has been widening. Cap rates are up 10 basis points between quarters and 50 basis points year-over-year, “maintaining a solid spread over BBB Corporate Bonds, though not yet reaching late 2021 and early 2022 levels.”
A lack of retail starts and steady demand has kept availability at about 5%, a historical low. Driving this is consumer demand for open-air neighborhoods, communities, and strip centers. Freestanding retail is also doing well. Consumers looking for QSR and fast-casual locations with drive-through windows. Malls, lifestyle, and outlet centers are the types of locations that have higher availability rates than the pre-pandemic period. At the same time, lease activity is down 31% year-over-year and about 33% below the pre-pandemic average.
Asking rents have continued to rise because landlords have raised rent spreads on both new leases and renewals. The reason: construction and build-out costs are high — and could get higher with tariffs and immigration action expected by the Trump administration — and retailers are shying off relocation or new store openings.
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