Retail Market Overview | 2022 Recap & 2023 Forecast

The United States’ retail market saw healthy expansion in 2022, with sales volume reaching $102 billion and over 80,000 transactions closing, pushing investors to continue planting capital in this sector. The average annual retail sales volume in the U.S. is $54.3 billion, with a record-high retail sales volume of $111.4 billion in a single year. 2022 saw a near-record high value due to the cost of goods going up, rent increases, and developers expanding. In the third quarter of 2022, $23 billion of retail properties traded hands, which is approximately 4.5 percent higher than the year prior. As inflation continues to rise, landlords are asking more for rents, increasing year-over-year rent costs by 3.9 percent, the fastest increase in one singular year in over a decade. On top of that, average triple net asking rents are sitting at $24 per square foot, a new high. New retail construction is limited which has transitioned to more adaptive reuse occurring in the sector, which a majority of construction being single tenant build-to-suit. Overall, the retail market was healthy in 2022, however the sector is expected to face headwinds in 2023.

Highlights

• 2022 recorded 47.3 million square feet in retail delivered to the market
• Slightly more than 250 million square feet of retail space was leased up
• Retail asking rents increased by 3.9 percent year-over-year and vacancy decreased to 4.3 percent
• Investment activity gravitated towards gateway markets, including New York, Los Angeles,
  and Chicago
• Growth in demand for medium to large spaces was driven by discount retailers, such as Dollar Tree and Dollar General

Rents | Vacancy | Construction

Retail rent growth has been strong nominally, up by 3.9 percent in 2022, with average asking rent sitting at a record of $24 per square-foot. The South and Southwest regions have seen rents increase substantially, in some cases by 10 percent or more. According to CoStar, retail rents will grow by 3.3 percent in 2023, which is approximately 90 bps lower than the forecast for the end of 2022, which sits at 4.2 percent. Vacancy in the retail market is at 4.3 percent, reflecting availabilities in malls, which is higher than pre-pandemic levels at a 6.9 percent vacancy rate. Additionally, shopping centers rated three-star and below are struggling to find retailers to fill available space. However, investors have sparked interest in mixed-use facilities and neighborhood centers, which are at a historic low in vacancy nationwide. Well-located power centers anchored by top-performing retailers are an additional top-performer with over $8.5 billion trading hands in the first 10 months of 2022. Markets seeing the most action included Las Vegas, San Diego, Denver, and Houston.

Retail construction has fundamentally balanced, decreasing development activity nationwide, with annual deliveries sitting at 46.2 million square feet, the lowest annual total on record. The concern of over-supply in the sector provoked investors to proceed with caution, focusing mainly on smaller freestanding properties, build-to-suit, and adaptive reuse. 85 percent of new retail deliveries were preleased this year, which is a direct reflection of investor precaution. New retail construction decreases can be attributed to longer timelines stemming from supply chain shortages. There is currently 64.2 million square feet of retail space underway across the country, with most new developments being in Florida and Texas submarkets including, Fort Lauderdale, Tampa, Dallas, and Austin.

Retail construction has fundamentally balanced, decreasing development activity nationwide, with annual deliveries sitting at 46.2 million square feet, the lowest annual total on record. The concern of over-supply in the sector provoked investors to proceed with caution, focusing mainly on smaller freestanding properties, build-to-suit, and adaptive reuse. The market saw 85 percent of new retail deliveries preleased this year, which is a direct reflection of investor precaution. New retail construction decreases can be attributed to longer timelines stemming from supply chain shortages. There is currently 64.2 million square feet of retail space underway across the country, with most new developments being in Florida and Texas submarkets including, Fort Lauderdale, Tampa, Dallas, and Austin.

Properties under construction mostly consist of freestanding general retail properties that are already preleased to national tenants.

Sales

Total retail property sales during the third quarter of 2022 totaled over $23 billion, according to CoStar. Retail sales have slowed down since May 2022, which can be attributed to rising interest rates across the country. General retail sales have declined 27 percent quarter-over-quarter in the third quarter of 2022, the lowest total recorded since Q1 2021. However, despite the decline in overall sales, properties such as neighborhood centers have been performing very well throughout the year, seeing $6.2 billion in sales in Q3 2022 alone, and $26.5 billion year-to-date. Pricing per square foot pushed even higher in the first half of 2022, at $237 per square foot, before falling to $220 in Q3 2022. Although there is a present decline, average transaction pricing remains eight percent higher on a year-over-year basis and 16 percent higher than pre-pandemic levels.

Market Outlook & Trends

With a recession looming and consumers having less disposable income, the future of the retail sector seems uncertain. It is expected that in 2023, consumers will continue to be “picky” about what they are spending their money on. Most consumers are focusing on essential items, which in turn is showing positive activity in grocers, discount retailers, and big-box retailers.

However, with the rising rates and inflation, investors are pivoting how they are planting capital in retail and where they are choosing to do so. Further, liquidity is low and investors are pulling back on certain investments, resulting in the bid-ask spread gap widening, making it more difficult to trade at a fair price. Additionally, since debt has become more expensive, the buying pool has shrunk. Retail buyers are pivoting to find more creative avenues for opportunities and bargains in the market. On the rent side, the ripple effect of inflation is anticipated to continue to push average rent growth to keep in line with costs. The outcome of increasing rents is making it more difficult for small locally owned business to make ends meet.

On the development side, the looming recession is not stopping developers from planting capital in the sector. The current shopper prioritizes experience, which is why developers are pivoting, reworking current properties under construction into mixed-use facilities. Ever since the pandemic, consumers are prioritizing health and overall wellness. In turn, this trend is taking a hit on indoor malls, especially as modern-day consumers prefer strip-style
shopping centers.