Everything's Rosy Now But 2023 Will Be a More Difficult Year for Retail

Retail continues to ride a post-pandemic wave that “has not let up yet,” according to researchers from Cushman & Wakefield, who say shopping enter tenants will continue to seek out high-quality locations amid limited supply.

Retail vacancy in shopping centers clocked in at 5.7% in Q4, with 10.4 million square feet of net absorption and asking rents just south of $23 psf. Around 12.6 million square feet is under construction nationally, according to Cushman & Wakefield.

But despite those rosy predictions, “the economic outlook has worsened, and 2023 will undoubtedly be a more difficult year for retailers,” Cushman experts say in a report breaking down the sector’s fourth quarter 2022 performance, noting that by late last year,  some shoppers were already pulling back on purchases on discretionary goods. But they also say retailers catering to upper-income consumers “will be more insulated from a spending pullback as these households have elevated levels of savings and will be less impacted by price pressures.”

“Outside of the wealthiest shoppers, we have seen some consumers trading down to discount retailers, which are expected to continue to gain market share in a recessionary environment,” the report states.

“Retailers seem to be confident enough that inflation and a probable recession in 2023 will not be overly disruptive to business; store openings in 2022 outpaced closures by nearly 2,500—the largest net expansion in a decade,” the report further states.. “In addition to resilience in core retail, consumer services such as medical, entertainment and dining are bolstering retail real estate demand more than they have in past economic cycles.”

And retailers are also still grappling with supply chain issues and delays: some overcorrected in 2022, while others are understocked.

“The extremes of either situation are problematic for earnings and profitability, which will eventually impact investment and expansion plans, so striking the right balance will be a high priority,” Cushman experts say. But “despite these emerging challenges, a mild recession is not likely to be overly disruptive to retail property markets. Corporate balance sheets in the retail sector are generally healthy, the e-commerce disruption has already peaked and overbuilding is not a remote threat.”

While Cushman does not predict a sharp decline in leasing activity, they do say demand will likely temper over the next few quarters. The firm’s baseline expectation is that retail vacancy will level out during 2023, allowing growth in rental rates to moderate as well.

“Despite the uncertain economic climate, retail CRE is at low risk of a major disruption over the next few years,” they say.