Rate Cuts Could Drive Foot Traffic, Retail Investor Activity

The retail sector is likely to benefit from the Fed’s overnight lending rate cut in September, both in terms of consumer spending leading to increased foot traffic as well as investor interest in opportunities in the sector.

Household budgets may have more room for discretionary spending as mortgage rates, auto loans and credit card fees experience downward pressure. These factors build on consumer resilience that has been driving tenant demand across the segment and core retail sales reaching a record mark in August, according to Marcus & Millichap’s Q4 retail national report.

The retail sector entered the second half of 2024 as the only major commercial real estate property type with a vacancy rate below its year-end 2019 recording, and broad demand continues within the space, the report said. National vacancy has held below five percent for 11 straight quarters, with the average asking rent rising throughout.

Primary and secondary vacancies stood at 4.7% and 4.5% respectively in June, and the tertiary rate was 3.9%. Conditions are even tighter when California performance data is removed, the report found.

Retail’s active pipeline equates to just 0.4% of existing stock and three-fourths of that space is accounted for. Thus, most expanding retailers will look to existing stock, the report said.

The retail sector accounted for more than 40 percent of CRE trades in the $1 million to $10 million price tranche over the year ended in June. The activity indicates a cohort of private investors are focused on net-leased assets and smaller shopping centers. Lower borrowing costs and favorable sector dynamics should heighten investor competition for these listings, especially if consumer spending remains resilient, said Marcus & Millichap.

The Fed’s action could spur additional transaction activity in the retail sector, which remains one of the more approachable property types. Loan originations are likely to increase and a more diverse lender base could offer high-leverage loans for retail borrowers. This trend emerged before the September rate cut, partially facilitated by pricing for retail assets rising slightly over the 12-month period ended in June, the report said.

During the first half of 2024, the average loan-to-value provided by CMBS lenders increased 430 basis points to 56.6% compared with the same period in 2023. Mean leverage offered by life insurance companies rose 150 basis points to 60.1%, with the source also increasing its share of overall retail lending — 19% —during the first six months of 2024, according to Marcus & Millichap.