Tight vacancy rates. Resilience. And growth. These are all positives of the U.S. retail sector according to the latest research from Cushman & Wakefield.
According to a first-quarter report from Cushman & Wakefield, the U.S. retail sector started 2023 riding the same healthy trends that it exhibited throughout last year. That includes a low vacancy rate for shopping centers thanks to strong tenant demand and limited new construction.
The national vacancy rate for retail shopping centers measured 5.6% across the United States in the first quarter of this year, according to Cushman & Wakefield. That’s the lowest this figure has been since at least 2007, with certain retail segments like value retail, ultra-luxury and consumer services performing especially well.
“Certain retail segmentsshould continue to see healthy activity. While spending on discretionary goods was already slowing after a pandemic surge, the pivot to more service-based consumption is a positive for retail uses like health and wellness or experiential retail, which typically necessitate in-person transactions and drive foot traffic throughout shopping centers,” said Barrie Scardina, Cushman & Wakefield’s Head of Retail, Americas, in a written statement.
This shouldn’t be surprising. The retail sector has long been strong, showing resilience even during the heightened economic uncertainty brought on by higher interest rates and inflation. Even with weaker job growth, consumers continue to spend at shopping centers.
The first quarter of 2023 was the eighth consecutive three-month period of positive net absorption in the retail CRE market. Cushman & Wakefield reported that the country saw 2.5 million square feet of retail absorption during the quarter.
Demand was especially strong in regions such as Houston, New York and Phoenix, while markets with negative absorption were mainly clustered in the West and Midwest regions, including Los Angeles, Las Vegas, San Diego, Seattle, Sacramento, Detroit and Kansas City. Neighborhood/community centers and strip centers experienced positive absorption, while power centers contracted for the first time in two years.
This doesn’t mean that the retail sector doesn’t face challenges. Cushman & Wakefield reported that new retail construction remained low in the first quarter of 2023, with just 1.7 million square feet of space delivered nationally. While the pipeline for new projects has improved from a pandemic-era low, tighter construction financing options and higher debt costs will limit further rebound in the near term, Cushman & Wakefield predicted.
“Near-term challenges have not yet deterred retailers from seeking out the value that physical retail locations provide in terms of profitability and customer acquisition over the long term,” said Scardina. “That is not to say that the coast is clear. Retailers are preparing for more challenging times ahead, with many large-cap names missing earnings estimates and marking down 2023 growth projections. Investors are taking notice and pressuring retailers to cut costs, which could eventually lead to rolling back of real estate investments.”
