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Retail Vacancy Rate Hits 17-Year Low

Landlords’ increasing leverage is sign of retail real estate’s recent strength

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Good morning. Retail landlords are halting discounts, reflecting a strong rebound for the retail real estate market. Meanwhile, U.S. apartment demand in Q4 2023 soared, especially in twelve key markets.

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Landlords Shift Away From Rent Discounts as Retail Recovers

Retail landlords are putting a stop to all those rent discounts and concessions they offered struggling tenants during the pandemic, signaling a positive rebound for the retail sector.

By the numbers: While many landlords reduced rent prices to help retailers, they’re now less likely to agree to such concessions. Property owners are finding it easier to fill prime retail space with the recovery of the retail sector. Store openings are outpacing closures for the second straight year in 2023, and vacancies at U.S. shopping centers have reached their lowest level since 2007.

Strengthening leverage: Landlords now have more leverage as vacancies at U.S. shopping centers fell to 5.3% in Q4, as average asking rents rose nearly 17% above 2019 levels to $23.70 PSF. This growing leverage reflects the optimism of retail landlords who believe limited available space, coupled with resilient consumer spending and improving economic views, will result in more retail demand.

Retail vs. Office: Retail is in a strong position compared to the struggling office sector. Office landlords are still offering concessions and free rent to attract tenants, while retail landlords are moving away from rent structures tied to percentage-of-sales. Retailers that renewed leases or opened new shops during the pandemic were often able to secure favorable lease terms, but landlords now prefer fixed-base rent structures to avoid relying on fluctuating monthly sales.

Older property challenges: While many retail landlords are shifting away from concessions, older and tired properties still have to offer discounts and accept lower rents to attract tenants. Additionally, landlords are investing in renovations and build-outs for new tenants, leading to higher construction costs. However, the prevalence of conversion to fixed-rent structures with overage rent suggests strength, even extending to enclosed malls.


Tables have turned: Retail's recovery is evident as landlords shift away from rent discounts. With store openings surpassing closures for the second consecutive year and vacancies at their lowest level in over a decade, retail property owners are confident in the future demand for limited available space. Despite older buildings requiring concessions, the overall outlook for retail remains positive.


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✍️ Editor’s Picks

  • BREIT battle: Blackstone's (BX) property fund, BREIT, faced $13B in outflows last year, posing significant challenges for future fundraising.

  • Frozen fortunes: A brutal winter hampers the American housing market as storms and subzero temperatures deter potential buyers and sellers.

  • Massive liquidation: China's biggest property developer, Evergrande, was ordered to liquidate by a Hong Kong court—possibly the biggest real estate liquidation in history.

  • What happened? The University of California purchased a former LA mall for $700M, receiving a tax exemption, while other deals with nonprofits or government buyers were not exempt.


  • Brought to you by...Declaration Partners, an investment firm backed by David Rubenstein, is raising $400M to invest in CRE amid falling property prices.

  • Rental shift: Nashville's rental market saw a turning point with double-digit vacancy rates, the highest in two decades, especially impacting the downtown area.

  • Protesting progress: Protesters disrupt Atlanta police training facility construction at a luxury apartment project. Two people were arrested and charged with criminal trespassing.

  • Doubling sales: Brooklyn's luxury market saw its weekly total volume double with signed deals for 16 homes asking $2M+.

  • Stop the bleeding: Multifamily prices in the U.S. were unchanged in December, breaking a streak of 16 monthly declines, but were still down 8.4% from 2022.

🏭 Industrial

  • Scored goals: Prologis (PLD) offered $24M to buy a former Raiders site in Oakland, which will serve as a training facility for soccer teams.

  • Falling fortunes: CRE prices fell in Q4, except for industrial properties, indicating increased consumer spending.

  • Expanding warehouses: CIP Real Estate secured $300M from Almanac Realty to expand its warehouse footprint, aiming to double its portfolio to $2.5B.

  • Cooling: In 2023, only 43 out of the top 100 industrial leases were for at least 1MSF, down from 63 leases signed the previous year.


  • Brews and burgers: With 80 vehicles in the drive-thru, CosMc's, a new McDonald's concept restaurant, is off to a strong start. But what is up with that name?

  • Bidding bonanza: LVMH, owner of 75 luxury brands including Christian Dior and Tiffany, is in talks to acquire 745 Fifth Ave. in Manhattan.

  • Antitrust woes: Amazon (AMZN) and Roomba-maker iRobot (IRBT) ended their $1.7B acquisition agreement due to antitrust scrutiny.

  • Evolving off-mall: The pandemic accelerated the trend of retailers like Macy's (M) and Foot Locker (FL) shrinking their mall footprints and focusing on off-mall locations for growth.


  • Distressed office sales: U.S. office buildings are being sold at significant discounts, with short sales expected to dominate in 2024 as distressed owners struggle to refinance debt.

  • Pokémon pounces: Pokémon Company Intl. leased 374 KSF at Skanska's 25-story tower in Downtown Bellevue, WA, occupying 72% of the space.

  • Leaving the capitol: Law firm Zuckerman Spaeder is relocating its Washington, D.C. offices to a smaller space, resulting in rent savings and increased efficiency.

  • Eating the loss: A State Street office and retail building in Chicago just sold for less than half its previous sale price. Ouch.


Markets Where 4Q Apartment Demand Outpaced Pre-COVID Norms

The U.S. apartment market showed strong momentum in Q4 of 2023, with certain regions significantly outperforming pre-COVID demand levels.

Leading the way: The Sun Belt region emerged as a standout performer in apartment demand, thanks to robust population growth and job market vitality. These factors contributed to heightened household formation and housing demand, with many Sun Belt markets also leading in new construction volumes.

National performance: Most major U.S. apartment markets experienced a resurgence in demand during Q4 2023. Twelve markets, in particular, exceeded long-term norms by a big margin. Phoenix, for instance, saw an impressive absorption of nearly 4,300 units, a stark contrast to its average demand in the decade prior to the pandemic. Houston and Austin in Texas also demonstrated remarkable recoveries, buoyed by job growth and new supply additions.

Zoom in: While cities like Atlanta, Minneapolis, and Detroit showed improvements, reversing trends of net move-outs seen from 2010 to 2019, Chicago still experienced net move-outs in Q4 2023, albeit at a reduced rate. Despite not matching the top performers, Detroit still marked a significant shift from net move-outs to a demand of approximately 1,100 units.

Falling short: A few markets, mainly in the West region, lagged behind pre-COVID demand averages, largely due to modest job gains and limited apartment supply. Despite its overall weak performance, San Diego managed a balanced annual outcome due to stronger absorption in the second and third quarters of 2023. Although it is experiencing growth, LA still fell short of its pre-pandemic absorption rates.


Why it matters: The Q4 2023 apartment demand highlights a pivotal shift in the U.S. residential market, with the Sun Belt leading a robust recovery. This trend underscores the evolving trend of urban migration, job growth, and housing needs in the post-pandemic era, with certain cities making significant comebacks and others still finding their footing.


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