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7 Jun 2024

Why Retail Is Preparing for a Reset


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Category: Net Lease Retail Tags: CREXI

Why Retail Is Preparing for a Reset

The U.S. retail sector is at a unique crossroads. On the one hand, red-hot consumer spending has carried retail into one of its liveliest eras in recent memory. Retail leasing activity remains strong due to steady demand and tightening supply. Plus, national cap rates and average asking rents were up compared to the end of last year. On the other hand, investment activity has slowed significantly due to unyielding interest rates and a widened bid-ask spread between buyers and sellers. And while still nowhere near 2022 levels, moderate upticks in inflation haven’t made a good case for the rate cuts on everyone’s radar.


Signs of a reset are already emerging, however. It’s true—consumers have certainly been more liberal in their spending over the past year. Cushioned by excess savings from the pandemic, Americans increased their spending each month during the first three months of 2024. And yet, the Federal Reserve Bank of San Francisco estimated that American households fully spent their pandemic-era savings as of March 2024. Does that mean consumers will stop spending so much? It appears so. American Economist Herb Stein said, “If something cannot go on forever, it will stop.” At the same time, retail’s historically sound fundamentals suggest that even a downturn in consumer savings—and therefore spending—won’t discourage investors.


National Retail Trends

Recent data provided by Crexi portrays a promising, more stable path for retail. Notably, retail sales assets ranked number one in search popularity in Q1 2024, while buy actions were up 20.53% from Q4 2023. Crexi’s retail tenant activity, which includes views and other lease-related actions taken on a property’s listing, was also up 13.99% quarter-over-quarter. Select metropolitan areas reported heightened retail numbers in the first quarter of 2024:


  • Los Angeles reported the highest average retail price at $521.43 per square foot.
  • Las Vegas reported the highest average asking retail rent at $16.54 per square foot.
  • Houston reported the highest cap rate for retail assets at 7.05%.


Similarly, Crexi identified the most-searched areas with retail properties for sale or lease:


  • Houston, Chicago, and Dallas were the most-searched cities for retail properties for sale.
  • Chicago, Houston, and New York City were the most-searched cities for retail lease listings.
  • Overall searches were up 36.33 QoQ for retail properties for sale and down 6.39% QoQ for retail lease listings.


While national retail offers were down 21.77% quarter-over-quarter in March 2024, year-over-year offers reported no change (0%).


National Average Asking Price Per SF

Source: Crexi

Quarter All Industrial Multifamily Office Retail
Q1 2023 $257.75 $152.99 $302.38 $219.77 $289.61
Q2 2023 $249.45 $158.29 $286.99 $223.23 $273.15
Q3 2023 $255.94 $158.97 $272.47 $227.60 $291.64
Q4 2023 $260.38 $165.33 $250.70 $235.66 $307.29
Q1 2024 $276.34 $172.08 $284.88 $232.84 $328.61


National Retail Statistics

Source: Crexi

Q1 2024 Q4 2023 Q1 2023 QoQ Change YoY Change
Average Occupancy Rate (New Listings) 84.64% 82.34% 81.56% +2.3% +3.08%
Average Annual Asking Rent Per Square Foot (New Listings) $15.34 $15.15 $15.17 +1.25% +1.12%
Median Asking Cap Rate (New Listings) 6.3% 6.3% 6.0% +0bps +30bps
Median Sold Cap Rate 6.6% 6.3% 6.2% +30bps +40bps


Consumers Still Hold the Keys

It’s only a matter of time before consumers stop spending as much as they have been. In March 2024, inflation-adjusted spending rose by 3.1% from the year before. At the same time, real income growth was slower than spending growth in February and March 2024, suggesting that consumers may rely more heavily on borrowing. Another slowdown worth noting is that of the U.S. labor market, which added only 175,000 jobs in April 2024 compared to the first quarter monthly average of 269,000. Add in moderately stubborn inflation and interest rates, and retail appears in for a challenging yet opportunistic year. Limited new retail construction and historically low availability rates should help limit any unexpected jump in vacancy rates caused by demand pulling back.


A Balancing Act

What does a reset for retail mean? For one, consumer spending is on track to normalize after months of excess. But if other factors persist, such as near-record-low unemployment and strong wage gains, Americans may not need to cut spending as much. Once inflation reaches levels deemed necessary by the Federal Reserve to cut back rates, retail development and investment activity will gain momentum again. Whether that happens this year is unclear, but until then, impressive demand from retail tenants will only strengthen the sector’s resilience.


Another way to look at it is that multiple, seemingly inverse forces are rounding out retail’s sharp edges: unprecedented consumer spending, unyielding fundamentals, and underperforming investment activity. As lingering effects from COVID—and perhaps even the GFC—finally dissipate, the magnitude of these forces will also soften and bring retail closer to a middle ground where investor interest is strong, supply meets an ever-resilient demand, and cap rates keep on an upward path.


This article was written in partnership with Crexi. Read the full article on Crex’s website here.

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