Retail Rents Will Maintain Record Highs in H1 2023

Strong occupancy rates, minimal new supply and falling availability rates will keep average net asking retail rents at record levels in the US despite growing signs of a national economic slowdown.

That’s the projection of the latest North American retail overview from Lee & Associates, a comprehensive report tracking CRE markets in regions and metros across the US and Canada.

The nearly 75M SF of positive net absorption in 2022 was the most in the US retail sector since 2017, pushing net asking rents up 4.1%—the fastest clip in more than a decade—and closing the year at a record average of $24 per SF.

With new construction on large projects grinding to a halt as developers and lenders withdraw in the face of rising interest rates, the balance between supply and demand will continue to lift rents, Lee’s report said.

Stable Inventory Favors Rent Growth

“We’re seeing strong occupancy rates and a much better balance between supply and demand. A lack of product being delivered is going to help support future rent growth,” said Lee & Associates CEO Jeffrey Rinkov.

“Inventory is at a very reasonable level and developers are being measured about where they’re looking to create new inventory,” he said.

According to Lee’s report, the US retail market faces virtually no threat from new supply as developers and lenders continue to shy away from large spec projects. The vast majority of new construction consists of single-tenant build-to-suits or smaller ground-floor spaces in mixed-use projects, and 80% of new development is pre-leased.

Availability rates, which hit a 15-year low of 4.9%, continue to fall in US markets. Lee & Associates’ quarterly market overviews are the only reports that track cap rates in CRE markets across North America. The Q1 retail overview reported average cap rates of 6.7% in the US market and 5% in Canada.

“The cost of capital has accelerated substantially faster than the adjustment in cap rates. That’s causing some investors to take a pause,” Rinkov said. “You will see continued slowness in triple net lease investment sales for the next two quarters.”

Average Lease Footprint Is Smaller Than Ever

Leasing activity in Q1 2023 was driven by strong growth for smaller retail spaces, with the average lease footprint hovering near the all-time low of 3,000 SF.

Leasing activity was propelled in Q1 by growth in store counts from quick-service brands including Starbucks, Crumbl Cookies, Yum Brands and Restaurant Brands International, which owns BK, Tim Hortons, Popeye’s and Firehouse Subs.

Cellular retailers T-Mobile and AT&T also have signed leases for dozens of small shop spaces this year. Growth in larger space has been driven by discounters Dollar Tree and Dollar General and off-price merchants TJ Maxx and Burlington.

Leasing activity has accelerated fastest in markets with strong population growth, including Las Vegas, Phoenix, Fort Lauderdale, Tampa, Atlanta, Dallas and Houston, Lee’s report said.

To download the Lee & Associates 2023 Q1 North America Market Report, click here.

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