Retail Faces Space Crunch as Vacancy Rates Plummet

Retail Faces Space Crunch as Vacancy Rates Plummet

The retail market is experiencing a significant space constraint, particularly in quality shopping centers, as vacancy rates hit a 20-year low.

Strong absorption: In the second quarter of 2024, the retail vacancy rate dropped to 5.3%, the lowest in two decades, with a net absorption of 1.4 million square feet of retail space, rebounding from a negative first quarter. Despite the slower growth in consumer spending, driven by reliance on savings and credit, real personal consumption saw a 2.4% increase year-over-year, with disposable income rising by 1.1%.

Consumer shifts: The Cushman & Wakefield report highlights record-high credit card usage and increasing delinquencies, with the personal saving rate averaging 3.7%, about half of what it was in 2019. These trends, while not immediately alarming, could lead to reduced consumer spending over time. Notably, there is a shift toward discount stores, which are set to account for nearly one-third of new retail openings this year.

Decline in space: Demand for retail space has significantly declined, with a 91% drop in the first half of 2024 compared to the same period in 2023. Absorption figures peaked at 39 million square feet in 2022 but have since decreased to 18.9 million in 2023 and just 834,000 square feet year-to-date, indicating a potential for the weakest absorption year since 2020.

Regional trends: The South leads the nation in retail space absorption, with significant contributions from Dallas/Fort Worth, Austin, Jacksonville, and Fort Myers. Other areas with positive absorption include Phoenix, Chicago, and the New York metro area. In contrast, the West saw negative absorption for the second consecutive quarter, with fewer than 50% of the markets showing positive demand.

Zoom in: Retail construction remains minimal, exacerbating the space crunch. The 9.8 million square feet of retail construction in 2023 set a new low, making up only 0.2% of the existing inventory, compared to 0.6% to 0.9% between 2015 and 2019. With only 11.3 million square feet of retail space currently under construction, supply constraints are expected to persist.

➥ THE TAKEAWAY

Big picture: Rents and operational costs are rising, possibly curbing expansion plans and leading to more store closures. Despite focusing on open-air shopping centers, the report also touches on the broader retail sector's evolution, suggesting top-tier malls might invest in retenanting and capital improvements while older malls consider redevelopment.

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