A record-breaking 200.4 million consumers shopped over the five-day holiday weekend from Thanksgiving Day through Cyber Monday, up 2% and surpassing last year’s record of 196.7 million, according to the annual survey released November 28th by the National Retail Federation and Prosper Insights and Analytics. The strong demand for in-store shopping is imperative for retail property owners, lenders and brokers as stores were hit hard by the onset of the pandemic in 2020 and consumer buying habits shifted further online.

Leasing Trends Shift

The retail sector continues to undergo a significant, long-term shift in response to changing consumer behavior. This transformation has included both a change in types of tenants leasing retail space and how certain categories of tenants are using their space. Service and food and beverage tenants, retailers that typically occupy a smaller footprint, have begun expanding at a rapid pace. On the other side of the coin, apparel and general merchandise retailers, who traditionally occupy larger, big box stores, have been changing how they utilize their space and reducing their store footprints in the process. Demand is now focused on smaller, more efficient spaces, resulting in an average lease size of 3,200 square feet, a new historic low.

During the first nine months of 2023, retail tenants leased 191 million square feet, approximately 9% lower as compared to the same time last year. As trends move towards a smaller footprint, there has been a decline in the number of big-box leases executed. Across the U.S., only 800 new retail leases of more than 25,000 square feet were signed during the first three quarters of 2023, which accounts for 17% of all new retail leases; this is down from 1,018 during the same period in 2022 and below the previous five-year average of 967. The share of leasing activity occurring under 5,000 square feet surpassed 50% during the first three quarters of the year for the first time on record, solidifying the change in demand.

Sources: CoStar News

Varying Cap Rates

Currently, more than half of all retail investment transactions have a purchase price below $5 million, with nearly 45% trading for less than $3 million. Most retail investment sales are driven by tax deferral and estate planning purposes; therefore, cap rates in the range of 4-5% are less of a concern for private buyers acquiring smaller assets via a 1031 exchange. On the other hand, larger investors seek retail investments with higher yields due to their increased cost of capital. For transactions ranging between $10-$25 million, cap rates increased to 6.5% in Q2 2023, up from a low of 5.6% in Q1 2022. Transactions exceeding $25 million, like distressed malls, are trading at cap rates in the upper single digits. From their peak, retail properties valued over $10 million have seen a price decline between 12-15%.

Sources: CoStar News

Retail: Fort Collins / Loveland / Larimer County

Sources: CoStar

Retail: Greeley / Weld County

Sources: CoStar

A Divided Recovery

The widespread return to brick-and-mortar shopping has resulted in a variety of retailers competing for limited space, especially in high-demand properties. According to CoStar data, the U.S. retail market reported its tightest vacancy rate on record, with less than 5% of all retail space available for lease by the end of Q3 2023; far below the historical average of ~6.8%.

Some of the nation’s largest retailers are taking a stronger stance when deciding whether to preserve or permanently shut struggling locations, a major shift that has resulted in several high-profile closings as some brands are no longer willing to operate in challenging locations. Retail closings have been historically driven by smaller businesses and brands that are more susceptible to economic challenges and lack of capital. In recent years retailers such as Target, Starbucks, Amazon, Walgreens and CVS, have closed locations with emerging challenges like worker shortages, reduced foot traffic or socioeconomic concerns.

Although a strong consumer demand has driven a resurgence of physical retail, the divided nature of the recovery in demand across retail box sizes is a blatant reminder that shifting consumer preferences will continue to drive a wide range of outcomes in the retail property sector. Successful retailers will require the right mix of brick-and-mortar and e-commerce to meet consumers’ needs.

Source: CoStar News

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