Retail Vacancy Rate Reaches 20-Year Low

The retail property market has kept historically tight as spending continues to grow, though at a slower pace with consumers relying more on savings and credit to buy goods.

The retail vacancy rate of 5.3% in the second quarter of 2024 was the lowest in the last 20 years. A net 1.4 million SF of retail space was absorbed in 2Q2024, recovering from the first quarter’s first negative reading in three years, according to Cushman & Wakefields’ 2Q2024 report on U.S. shopping centers.

Retail was buoyed by a 2.4% increase in real personal consumption spending compared to 2023 as real disposable personal income rose 1.1%. However, “Credit card usage is at an all-time high and delinquencies for some cohorts are rising,” the report noted. The personal saving rate averaged 3.7% over the past six months, or about half the 2019 rate.

The report said these trends were not a reason for concern in the short term but could over time result in softer spending. Consumers are adapting by heading to discount stores, which account for nearly one-third of planned retail store openings this year.

Demand for retail space in the first six months of 2024 was 91% lower than in the same period in 2023. “It’s safe to say that occupier sentiment is cooling. After peaking at 39 MSF in 2022, absorption slipped to 18.9 MSF in 2023 and is now at 834,000 SF year-to-date – which is on pace for the weakest year since 2020,” the report stated.

The South accounted for more than 75% of absorption, led by Dallas/Fort Worth, Austin, Jacksonville and Fort Myers, FL. Absorption was also up in Phoenix, Chicago, and the New York metro area. But in the West, absorption was negative for the second quarter in a row. Fewer than half the markets in the region saw positive demand.

The report noted absorption might be affected by the limited shopping space up for lease as retail construction dived. The 9.8 MSF of retail construction in 2023 set a new low, accounting for only 0.2% of existing inventory compared to the average of 0.6% to 0.9%, from 2015-2019. “For the first time in years, the retail market is at a point of being supply-constrained – at least for space in quality shopping centers,” Cushman commented. “Currently, there is only 11.3 MSF of retail space under construction, so new supply will remain paltry for the next several years.”

The space crunch is being felt by shopping centers nationally, where vacancy rates held steady at 5.3%. In 10 of the 81 markets Cushman & Wakefield tracks, vacancy was less than 3.5%, especially in the South, while asking rents continued to increase, rising to $24.37 per SF in the second quarter, up 3.8% from a year earlier.

The report also noted the rising costs of retail space. Rent was not the only factor. Fit-out construction, operations, security and insurance also contributed. It could lead stores to cut back on expansion plans – or even worse. “Additional retailer bankruptcies and mergers could also materialize, resulting in increased store closures,” Cushman warned.

While the report focused on open-air shopping centers, it noted that the broader retail sector “continues to evolve with a high degree of nuance.” Top-tier malls could turn to retenanting and capital improvements, older ones might have to consider redevelopment, and urban retail could remain a laggard in some neighborhoods.

“Despite these challenges, the overarching takeaway is that retail real estate remains in a healthy place,” the report concluded.