2023 End-of-Year Retail Market Report

Despite ongoing worries about a weakening economy and a potential decrease in consumer spending, the U.S. retail market remained resilient throughout 2023. This resilience can be attributed to consistent demand from various sectors, a notable reduction in store closures, and limited additions to new supply. In 2023, there was an almost historically low addition of approximately 52 million square feet of new retail space, representing a decrease of more than 40% compared to the sector’s typical historical average. The recent construction has mainly concentrated on build-to-suits, grocery-anchored centers, or smaller retail spaces within extensive mixed-use projects. Due to the scarcity of available space, many tenants are encountering challenges in securing locations, particularly those seeking midsized boxes and outparcels in the primary corridors of rapidly growing Sunbelt markets.

Highlights

• In the last 12 months, the retail market recorded approximately 50 million square feet in retail deliveries and net absorption recorded 52.3 million square feet of retail space.
• Retail asking rents increased by 3.3% over the past 12 months and vacancy decreased to 4.1%.
• In the last five years, more than 145 million square feet of space have been demolished, with the majority located within or connected to underperforming malls.
• Investment sales exceeding $10 million, which had cap rates in the mid-5% range in early 2022, increased to the 6% to 7% range year-end 2023.

In 2023, transaction activity in retail decreased 38% YOY. While any decline is concerning, it’s worth nothing that this reduction was considerable less sever than the 51% overall commercial property transactions decline in 2023. – Source: RCA

Rents | Vacancy

Retail rent growth has been strong nominally, up by 3.3% in 2023, with average asking rent sitting at a record of $25 per square foot. Landlords, on average, are experiencing increased pricing leverage due to a reduced supply of competitive available space. Retail rents in markets that have attracted a significant share of population and purchasing power growth, primarily those in the South and Southwest, have generally shown strong performance over the past year. Out of the top 10 markets with the fastest rent growth in the past year, nine are located in the South or Southwest, with four ranking in the top five. These markets not only experience above-average growth in purchasing power but also benefit from lower levels of outdated space and generally tighter availability.

Vacancy in the retail market is at 4.1%, with malls having the highest rate of 8.5%. Availability has reached historically low levels in small to mid-sized centers and standalone single-tenant properties. Conversely, within the mall segment, comprising regional and super-regional malls as well as lifestyle centers, availability has consistently increased since the onset of the pandemic.

Construction

The threat from new supply is expected to be minimal in the foreseeable future. Over the last year, there has been a near-historic low of 52 million square feet of new retail space delivered, which is more than 40% lower than the sector’s average. Additionally, there has been a consistent decline in construction starts over the past year despite tightening market fundamentals. While this trend may seem unusual in a typically tight market, it can be attributed to the recent increase in construction financing costs and record-high land and labor expenses, which pose challenges to the economic viability of new development in many cases. Consequently, the decline in construction starts is likely to persist until the economics of new developments improve, driven by a combination of moderating input costs and increasing rents.

Sales

In 2023, the total value of retail transactions dropped to around $57 billion, the same pace as 2020 but for different reasons. Falling sales volume is heavily attributed to mismatched pricing expectations as builders deliver new pre-leased offerings. When compared to the decade-long trend, 2023’s initial sales estimates signify a decline of about 25%. 2023 also experienced a rebound in entity-level sales. M&A-type deals were up 134% from a year earlier. While it was only a small number of deals, typically mergers of REITs, it was a headline figure.

Retail cap rates increased in line with the price declines over the course of the year. The hedonic cap rate series for shopping centers, according to RCA, concluded at 7.3% in 2023, marking a 40 basis points increase and returning to pre-pandemic levels. Shop space experienced a 60 basis points increase, averaging at 6.3% for the year, surpassing pre-pandemic levels.

Market Outlook & Trends

In 2024, greater digitization, customization, and efficiency will define the retail landscape. The surge in online shopping is reshaping the industry, prompting retailers to invest in robust e-commerce systems. Brick-and-mortar stores are adapting by offering curbside or in-store pickup services for quicker access to purchases. Omnichannel retailing, exemplified by significant players like Walmart and Target, provides a unified shopping experience across physical stores, mobile apps, and websites, enhancing customer satisfaction.

Throughout 2023, U.S. retail investor sentiment hit a record-breaking high, which was buoyed by the sudden progress in AI capabilities. In addition, the retail industry is undergoing a technological shift, with self-checkout experiences, including kiosks and scan-and-go technology, meeting evolving customer preferences.

The “shrink-tail” trend sees retailers reducing store footprints, exemplified by smaller-format stores like pharmacies gaining preference. In-store collaborations are also on the rise, with brands sharing space to attract a broader customer base through synergies. These trends collectively reflect the dynamic and evolving nature of the retail sector in 2024.

To read the 2022 end of year report, please click here.