Retail Sector Logs 11th Quarter of Sub-5% Vacancy

Consumer resiliency has helped drive core retail sales to a new record in August, with spending up in real terms even after factoring in core CPI inflation. This strength helped drive tenant demand, and the retail sector entered the second half of 2024 as the only major CRE property type with a vacancy rate below its year-end 2019 mark, according to Marcus & Millichap’s Q4 national retail report.

Retail vacancy across the country has remained below 5% for 11 straight quarters while average asking rents have increased. Conditions are even tighter when California is removed from the equation. Vacancy across the 42 major markets located outside the state collectively dipped 10 basis points to 4.3 percent over the year ended in June, with tenants absorbing a net of 32 million square feet.

Potential headwinds remain for the retail sector, including tightening household budgets and labor market softness, the report noted. But the September rate cut should help save consumers money on mortgages, vehicle loans and credit card fees, which could bolster discretionary spending, retail foot traffic and tenant demand for space.

The active retail construction pipeline equated to just 0.4 percent of existing stock, with three-fourths of this space accounted for. The limited volume of available square footage underway should steer most expanding retailers to existing stock, said the report.

The retail sector accounted for more than 40 percent of trades in the $1 million to $10 million price tranche for the year ended in June. Marcus & Millichap said this signals a cohort of private investors is focused on net-leased assets and smaller shopping centers, often as part of 1031 exchange transactions. Closings in this price range rose 10 percent during the second quarter.

Retail deal flow fell on an annual basis over the first eight months of 2024, but the number of fast food-related trades rose. With scant vacancy and a number of chains in expansion mode, investors are competing for properties net-leased to these tenants.

Larger spaces vacated via big-box move-outs are being backfilled in relatively short time frames, often by discount and off-price retailers. Foot traffic at convenience stores outpaced or held steady compared with 2023 in seven out of the first eight months of 2024, indicating consumers are prioritizing affordable quick-stop options.

The recently announced interest rate cut and expectations for further reductions are likely to heighten investor demand for financing and credit availability, translating to a rise in loan originations, said the report.