Retail Space Demand Drops As Consumers Burn Off Savings

Rising household savings accrued during the pandemic gave the consumer ample amounts of money to spend, bolstering consumption until recently and pushing up inflation.

But today’s higher interest rates are starting to bite into spending more now that the excess savings are nearly burned off.

Those dwindling savings and the slackening pace of retail sales growth are now beginning to reduce demand for retail space, says John Chang, SVP with Marcus & Millichap.

Space absorption in the first half of 2023, while positive, is estimated to be about one-third of what it was last year.

Industrial space demand is following a similar trend, also around one-third of what it was last year.

“If the US skirts a recession and simply goes into a period of slow growth, as many economists currently forecast, absorption for both property types, should remain modestly positive, as we navigate the soft patch,” Chang said.

Hotels likely face a similar outlook, he said.

While occupancy rates have been quite strong, especially considering that many hotels are still operating with a staff shortage, the average daily rates may ease a bit “as consumers become more mindful of their budgets and leisure travel slackens,” according to Chang.

At the same time, the reduced savings levels could restrain home sales in turn favoring apartment demand.

“Given the recent rise in consumer sentiment, apartment absorption should sustain its positive momentum,” he said.

Chang said the big variable will still be the Federal Reserve. Like Wall Street, he expects a rate increase on July 26.

“Chairman Powell’s comments during the press conference will be telling,” Chang said.

“Hopefully, he’ll suggest the Fed will be data-driven through the remainder of the year and signal that additional rate increases may not be needed. That would suggest the Fed believes inflation is coming back under control.”