SimonCRE Quarterly
As we move into the second half of 2024, the U.S. retail market remains remarkably resilient despite broader economic challenges. Here are the key highlights shaping the national retail landscape:?
Tenant Demand is Strong
The retail market is currently experiencing a robust phase, driven by steadily rising demand, fewer tenant bankruptcies, and limited new supply. Nationally, the demand for retail space is surging at a considerable rate, with 49 million square feet of deliveries occurring in the last 12 months and 40.1 million square feet of net absorption in that same time period, with significant contributions from tenants in the food and beverage, discount, off-price, and experiential sectors. These categories alone account for over half of all new leasing activity in the past year.
Pullback in tenant move-outs due to closures or bankruptcies has significantly bolstered demand. Consequently, the available retail space has reached a historic low of 4.8%, down from the historical average of 6.8%. There is strong demand despite rumored bankruptcies and store closures from retailers such as Dollar Tree, and the limited availability of retail space has naturally led to near-record rent growth, as other retailers are willing to pay a premium for prime locations. Target, Burlington, Five Below, and Ulta Beauty are just a few of the many retailers on a major growth trajectory in this market.?
Supply and Construction are Improving
Nationally, new retail development remains minimal, with only 62 million square feet of new space delivered in the past year—40% below the prior 10-year average. Most new construction consists of single-tenant build-to-suits or smaller ground-floor spaces in mixed-use developments. The ongoing trend of demolishing obsolete space, particularly within underperforming malls, has further tightened supply. Over 155 million square feet of retail space have been demolished in the past five years.
Looking ahead, the U.S. retail market is set to maintain this tight supply environment, with only 50.8 million square feet of retail space currently under construction. The strong pre-lease rate currently occurring underscores the ongoing robust demand for retail space and is one that we have seen with our newer developments. We are starting to see the supply chain improving for previous problem areas, such as electrical equipment. However, securing these materials in line with development timelines continues to be a delicate dance.??
Leasing Activity Remains Consistent
Leasing activity, while slightly subdued compared to pre-pandemic levels, remains vibrant. Over the past four quarters, tenants have signed for approximately 250 million square feet of space, the lowest level recorded since 2020. However, this is primarily due to limited supply rather than a decline in demand. Smaller spaces, particularly those under 2,500 square feet, have seen significant leasing activity driven by quick-service restaurants and personal services. Simultaneously, many big box retailers and other tenants that would have traditionally occupied larger spaces are adjusting their offerings to utilize these smaller spaces.??
In larger spaces, there is a notable shift towards experiential tenants, such as gyms and entertainment venues, which now account for approximately 15% of all leasing activity. This trend reflects the broader transformation within the retail sector, where traditional retail formats are giving way to new models that prioritize experience and engagement. The presence of these smaller, flexible retail offerings caters to the day-to-day needs of local consumers, supporting sustained foot traffic and stable rental income for property owners.
Investment Climate is Lukewarm
The retail investment market has seen a decline in transaction volumes, with nearly $20 billion in deals recorded by mid-2024. Rising interest rates and broader economic uncertainties have tempered investment enthusiasm. Transactions under $5 million have dropped significantly, down 61% from their 2021 peak of $22.4 billion to the current $8.6 billion. Larger deals have also seen steep declines, with sales in the $5 million to $25 million price range dropping 71% to $4.9 billion and transactions exceeding $25 million dropping 78% to $1.5 billion, further reflecting a downturn for transactions compared to the bustling activity seen in previous years.
Despite this, specific segments remain attractive to investors, particularly grocery-anchored neighborhood centers and single-tenant properties. These segments are prized for their resilience during economic fluctuations, their ability to offer stable returns, and the relatively lower management demands of these properties as they look to reduce the operational complexities and costs associated with larger, more diverse retail environments.?
Looking Ahead
The U.S. retail market is expected to maintain its stability, supported by minimal new supply and steady demand. While economic conditions may moderate growth, the underlying fundamentals suggest a balance between supply and demand, keeping vacancy rates low and supporting continued rent growth. While we remain concerned about the consumer's ability to continue spending in the current economy, with the combination of a lack of new space coming to market and the long cycles of development for newer properties, we expect new development and redevelopment opportunities through tenant bank receipts to act as a strong driving force for the industry.?
As we navigate the evolving landscape, our strategic focus remains on leveraging these market dynamics to enhance portfolio performance and deliver sustained growth. We appreciate your continued support and look forward to a promising second half of the year.
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