Dive Brief:
- Net absorption of U.S. retail space in Q2 — vacancy at the start versus the end of the period — was 5.9 million square feet, the lowest demand since Q3 2020, according to a report from real estate investment firm CBRE.
- The overall availability rate fell by 10 basis points year over year to a record-low 4.8%. The average asking rent rose 2.1%, driven by several markets in Florida as well as Raleigh, North Carolina.
- Demand is higher in the suburbs than in downtowns, with the overall suburban availability rate lower than the overall downtown rate for the fourth straight quarter, per the report.
Dive Insight:
Shifting retail location strategies and high financing and construction costs are shaking up demand for space.
In the second quarter, just 5.9 million square feet of retail space was constructed, the third-lowest quarterly total in a decade, according to CBRE. “The retail development pipeline will likely remain slow, as the market contends with economic uncertainty and elevated construction materials costs,” researchers said in the report.
High office vacancies are dampening demand for retail space in core areas of some cities, though even in places like San Francisco, where retailers are fleeing downtown shopping districts, neighborhoods are thriving, according to Nick Egelanian, president of retail development firm SiteWorks.
High-profile bankruptcies like Bed Bath & Beyond have made their mark. As the home goods retailer winds up its liquidation, very few, if any, stores will remain open. The company ran 360 stores in the U.S. when it filed for bankruptcy in April, down from 949 stores as of late last year.
Partly due to bankruptcy filings “by several big-box retailers,” Q2 net absorption in the power-center segment was negative 727,000 square feet, according to CBRE’s report. That followed nine straight quarters of positive net absorption.
Yet retail space availability also hit record lows in the period, falling by 10 basis points to 4.8% overall, per CBRE. Availability in neighborhood, community and strip centers also fell by 10 basis points to a record-low 6.7%.
In fact, the negative net absorption likely reflects high occupancy rates, rather than low demand, according to Egelanian.
“With occupancy at record highs, there is very little to absorb,” he said by email.
Availability in lifestyle and mall centers rose 20 basis points to 6.2%, however, as retailers continue to close underperforming mall locations, CBRE said. Retail giants including Victoria’s Secret, Gap Inc. and even anchors like Macy’s have increasingly abandoned malls in favor of strip centers and other off-mall areas.
Tight availability in the second quarter led to higher rents. The overall average asking rent rose 0.6% to $23.21 per square foot, the highest quarter-over-quarter increase since Q1 2022, per CBRE. Year over year, average asking rent rose 2.1%, with neighborhood, community and strip centers seeing the largest increase, at 2.7%.
“Overall, the biggest factor affecting retail right now is the disconnect between supply and demand for space and the cost of raw materials and credit, versus affordable rents,” Egelanian said. “This is causing a lot of short- to medium-term market dislocation.”