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RETAIL SUPPLY AND DEMAND LIKELY TO REMAIN IN BALANCE FOR FORESEEABLE FUTURE - Minimal New Supply Underpins Tight Retail Forecast
The U.S. retail market has demonstrated remarkable resilience over the past three years, culminating in historically tight availability at the end of 2023 with the national average vacancy rate hitting a new low of just 4.0%. Current demand and supply-side factors are likely to persist regardless of economic conditions and keep a lid on available space options for retailers.
On the demand front, the retail sector has benefited significantly from a marked decrease in bankruptcies and large-scale store closures over the past three years, resulting in a 20% reduction in the amount of retail space vacated compared to pre-pandemic norms.
With retail tenants no longer moving out of space at the same robust clip seen in 2017 through 2020 and demand supported by a historic surge in consumer spending, the amount of available retail space tightened quickly as less and less backfill space became available.
Supply-side factors equally drove the rapid contraction in vacancy, as very little new retail development coupled with an active pace of demolitions resulted in the lowest levels of net retail space deliveries seen in decades. Specifically, post-demolition net deliveries dwindled to 52.9 million square feet in 2023, the lowest level recorded since CoStar began tracking the measure. Moreover, since the start of 2018, more than 160 million square feet of vacant retail space have been demolished across the U.S.
The net result of these two trends has been historically tight market conditions, which appear likely to remain in place for the foreseeable future based on the current range of outcomes under CoStar's forecast scenarios.
CoStar provides clients with seven scenarios to test possible outcomes for the expected performance of commercial real estate space and capital markets based on various underlying economic conditions. In only the two most-adverse scenarios, the Depression and Severe Downside alternatives does retail vacancy increase above 5%, and it is forecast to remain below the market’s post-2010 average of 5.4% under each of the two scenarios.
Several critical factors underpin this outlook. First, the current national retail vacancy rate is below its post-2010 average by 140 basis points, offering a substantial cushion against potential market softening.
Second, thanks to the boost in consumption coming out of the pandemic, retail sales, excluding e-commerce, stand 10% higher than pre-pandemic levels, even after accounting for inflation. This increased sales potential suggests closures will likely be limited to a select few underperforming stores and those stemming from bankruptcies. Notably, despite the well-publicized struggles of long-term underperformers such as Joanne and Express, retail bankruptcies are expected to remain below pre-pandemic levels into 2024.
Third, the amount of new retail supply is expected to remain well below historical norms due to retail construction starts plummeting in 2023. This scarcity of new supply is expected to play a crucial role in maintaining low vacancy rates across the retail sector, as any meaningful increase in vacancy will need to be solely driven by demand-side factors.
While a softening in demand is quite possible should consumer spending retrench in the year ahead, a significant decline in space demand seems unlikely given retailers' announced plans for thousands of new stores over the coming years, with little available supply to accommodate that growth.
By: Brandon Svec, CoStar Analytics
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