2023 Q3 Saw Problems for Retail, Especially With Low Construction

CoStar Group released its review in retail, multifamily, hospitality and office for the third quarter of 2023. While not all have been bad, it was a tough period for each of these property types. The list doesn’t include all, like industrial, but each company has its own focus and data. The hope is that by bringing different sources together, a more accurate view might be possible.

Here are some of the numbers for retail.

The bad news is that retail leasing has “steadily declined” through the year. Even as activity with deals signed near the end of the quarter will likely rise in retrospect, CoStar still expects that Q3 will have been the worst performing for retail since 2020. So far, 176.9 million square feet have been leased since the beginning of the year, but that’s 16.5% down compared to the 211.9 million square feet in the same period during 2022. As always, it’s necessary to remember that 2021 and 2022 were very hot years that set high benchmarks.

A total of 13.7 million square feet of space was filled net in the quarter, marking the 11th quarter in a row that saw positive net filling. Still down, though.

“Overall, a net positive of 42.3 million square feet of space has been occupied year to date compared to 74.8 million square feet during the same period last year,” CoStar wrote.

One of the problems for the industry is a lack of available space, which is depressing both leasing and absorption activity. “The amount of available retail space fell to a new historic low of 4.65% in Q3 2023, which was down by 0.13% over the past year and by 1.5% over the past 3 years,” CoStar wrote.

Increasing the problem is that construction starts for retail hit their lowest levels for a number of decades during the first three quarters of 2023. That almost guarantees that low availability will hang over the industry for the foreseeable future.

Also, high interest rates are having a negative effect. “Despite strong space market performance, retail capital markets continue to be impacted by the high cost and limited availability of debt financing,” CoStar wrote. With strong occupancy and NOI increases, many retail landlords are staying put and not selling, given the difficulty of getting a price they want with finance costs making many deals untenable.

Transactions year to date have been $45.9 billion, down from $95.4 billion during the same period last year. What has gained traction, for the most part, are deals under $5 million because they make a private all-cash or 1031-style tax-advantaged move more possible.