U.S. Retail Keeps Trooping On, Says Cushman & Wakefield

When trying to judge a market, deciding which metrics represent a greater reality gets tricky. Cushman & Wakefield’s recent look at retail in the third quarter of 2023 offers several takeaways that paint an upbeat picture in a tough environment.

“The U.S. retail real estate market remained strong in the third quarter of 2023, thanks to healthy tenant demand and resilient consumer spending,” the firm wrote. “The vacancy rate came in at a historic low of 5.4% in the third quarter, down 5 basis points (bps) from the Q2 level; it’s down 40 bps compared to the third quarter of 2022 and 80 bps versus the pre-pandemic rate, pushing average asking rents higher in a competitive market.”

Cushman & Wakefield points to continuing increases in consumer spending, with retailers responding by expanding their locations. “Post-pandemic demographic and shopping patterns are also creating pathways for service-oriented companies to occupy more retail space in new locations, particularly in the suburbs of Sun Belt markets.”

It sounds better on the surface than digging into the reality of drivers, though. The firm also wrote, “Amid this demand resurgence, new construction has been severely limited, helping to drive vacancy rates lower and giving landlords leverage to raise rents.

“As a result of limited new supply and robust demand, vacancy rates continued to tighten,” the firm wrote. “The national shopping center vacancy rate fell 60 bps year over year (YoY) to 5.4% in the second quarter, marking the lowest rate since the beginning of our data in 2007.”

Leverage for raising rents meant national average asking rents of $23.47 per square foot were 4.7% higher than the same period in 2022, and 16% over 2019 levels.

CoStar recently also noted the low construction levels in retail. The bad news, according to the firm. is that retail leasing has “steadily declined” through the year. It 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 constraint on supply combined with higher demand can make conditions look better than another view might suggest. Go back to consumer spending for a moment: government figures from the Census Bureau have two major caveats. One is that the confidence interval on the data usually includes zero, so there is no way to know statistically whether there was any change at all.

The other caveat: increases don’t consider price changes, meaning that inflation pressures are too often attributed to consumer desire rather than a lack of choice. What that ultimately means for retail in the next few years, as credit use booms and wages in real terms are below 2019 levels, remains to be seen.