Retail

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Retail

STEADY AS SHE GOES

Economic Drivers

The U.S. consumer continues to spend thanks to a favorable job market and increases in real incomes. Real personal consumption expenditures increased at a healthy 2.5% rate in the first quarter, even as inflation reaccelerated.
While overall spending remains solid, consumers continue to shift their budgets, resulting in disparate outcomes by sector. Furniture, electronics and appliances, and home improvement categories are generally seeing declining retail sales compared to 2023, while restaurants, e-commerce and mass merchandisers outperform—in both real and nominal terms.
Consumers continue to dip into savings and credit to finance spending. The personal savings rate averaged 3.6% in the first quarter, roughly half the 6.2% average from 2015-2019. Additionally, the share of delinquent credit card accounts is at a 13-year high, as primarily lower-income households remain under financial pressure.

Outlook

The retail sector will continue to be resilient amid steady demand and limited new supply, even as consumer spending throttles back. The national vacancy rate for open-air shopping centers is currently at an all-time low of 5.4% and is forecast to tick up a marginal 40 basis points (bps) over the next two years.

Demand for retail space remains robust, in part because of a strong pipeline of store openings by large retailers. Thus far in 2024, there are roughly 850 more store openings planned than closures.

Tenant mix continues to diversify as well, limiting the downside risk of sector-specific weakness. Beyond traditional retailers, consumer service providers—including restaurants, education/healthcare, beauty and wellness—are leasing more space in retail centers. Consumers will continue to rotate back to service-oriented spending that has lagged post-pandemic, benefiting retail centers featuring these offerings.

The lack of new supply is a key aspect of the outlook. With less than 12 million square feet of retail space under construction and over 4.3 billion square feet of inventory, high-quality retail locations will remain scarce. New supply is not expected to ramp up to its 2010-2019 average until 2027, at the earliest.

Owners of well-located shopping centers will continue to have leverage to raise rents given the demand and supply dynamics, although rent growth is poised to slow over the next several years. After peaking at 5.0% in 2022, rent growth will average 2.9% from 2024-2026.

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