Virtually non-existent retail construction and the slowing pace of industrial construction will be key factors driving the performance of both sectors, according to Marcus & Millichap national director of research and advisory services, John Chang.

The retail vacancy rate remained stable during the third quarter at 4.5%, with 2.7 million square feet of net absorption, which reflects a lack of available space. The overall retail vacancy rate, including for multitenant and single-tenant properties, has been stable for 10 quarters.

“Although we all see the stories about retailers going out of business and shuttering locations, I'm generally hearing that there's usually a line out the door waiting to get that vacated space,” said Chang. “The exception, of course, is space in the older, underperforming, enclosed shopping malls.”

However national vacancy rates are in the low 4% range for open-air and multitenant retail centers, the lowest they have ever been, he said. Rent growth has been steady but modest over the past four years at about 3.3% per year. During the third quarter this year, it was 2.5%.

“Several retail property owners I've spoken with have told me they're getting stronger bumps on new leases, and existing tenants are stepping up to higher rates on renewal,” said Chang. “But I'm also hearing that the current lease rates still aren't high enough for new development to pencil.”

Only about 30 million square feet of new retail space is expected this year, and of that about three-quarters is single-tenant space being constructed for specific tenants. This translates into minimal supply risk for investors, he said.

The strongest retail markets have been in areas with strong migration, including Florida, Texas, Charlotte and Nashville, as well as Indianapolis, Salt Lake City and Northern New Jersey.

The state of retail, especially e-commerce, over the past few years, has bolstered industrial space demand, but the pace of absorption has tapered over the past two years and builders have been adding industrial warehouses at a record pace, said Chang.

In 2023, a record 517 million square feet of industrial space was added, outpacing the 153 million square feet of absorption, which lifted the vacancy rate substantially. During the third quarter, 54 million square feet was completed, outpacing 22 million square feet of net absorption. Industrial vacancy grew 20 basis points to 6.6%, the highest national average since 2014. Average industrial asking rents have tapered over the past couple of years and were down 0.4% year over year during the third quarter.

“The good news for investors is that the pace of construction is slowing, with about 315 million square feet expected in 2024 and only about 210 million square feet anticipated in 2025,” said Chang. “At the same time, consumption remains robust and e-commerce sales have continued to track higher. So if industrial development continues to slow, the supply overhang should be absorbed in a couple years, as long as retail sales remain healthy.”

Metros with outsized development are likely to face the greatest short-term headwinds. These markets include Atlanta, Austin, Charleston, Dallas and Phoenix. Meanwhile metros with more limited inventory growth – Chicago, Cincinnati, Louisville and Minneapolis – offer more durability.