RETAIL INVESTMENT GUIDE
MARKET OVERVIEW
Source:
RETAIL INVESTMENT GUIDE
The U.S. retail sector saw positive growth in Q1 2023 despite worries about increased costs and a potential economic downturn. Demand from various sectors and slower store closures contributed to this expansion. According to CoStar Group, the retail market is currently at its tightest level, with only 4.7 percent of available space remaining, well below historical averages. This scarcity of space, especially in desirable locations, has caused leasing activity to decrease. However, demand for retail space continues to rise, and new development is limited, with most construction focusing on single-tenant builds or smaller spaces. Obsolete retail space is actively being demolished, particularly malls and within declining markets. As a result of limited availability and strong sales, rental prices have reached a record high but may
Source:
CoStar Group
INDICATORS
KEY
CoStar Group 12 Mo Deliveries in SF 12 Mo Net Absorption in SF Vacancy Rate 12 Mo Rent Growth 49.2M 52.1M 4.2% 3.6% 12 Mo Vacancy Change (YOY) Sales Volume -0.2% $75B Q2 2023 RBA Malls 909,118 Power Center 799,161 Neighborhood Center 2,982,122 Strip Center 703,761 General Retail 6,433,055 Other 92,296 National 11,919,464
Source: CoStar Group 12
NATIONAL AVERAGE: 3.6% Atlanta 6.9% Nashville 7.7% New York 1.1% Denver 1.9% Austin 6.9% San Diego 5.1% Tampa 8.4% Los Angeles 1.3% Fort Lauderdale 10.3% Jacksonville 12.3% Dallas/ Fort Worth 4.2% Chicago 3.1% Minneapolis 3.6% Orange County 4.2% Phoenix 9.0% } Atlanta, GA: 6.9% } Austin, TX: 6.9% } Chicago, IL: 3.1% } Cleveland, OH: 7.0% } Dallas-Fort Worth, TX: 4.2% } Denver, CO: 1.9% } Los Angeles, CA: 1.3% } Fort Lauderdale, FL: 10.3% } Jacksonville, FL: 12.3% } Minneapolis, MN: 3.6% } Nashville, TN: 7.7% } New York, NY: 1.1% } Orange County, CA: 4.2% } Phoenix, AZ: 9.0% } San Diego, CA: 5.1% } Tampa, FL: 8.4% Cleveland 7.0%
Month NATIONAL RENT GROWTH
national vacancy trends
The retail industry is exhibiting exceptional strength, with record-low vacancy rates, high demand, and significant, albeit slower, rent increases. As of Q2 2023, the vacancy rate stands at 4.2 percent, its lowest level in years. The retail sector can capitalize on the benefits of modest supply deliveries and nontraditional users’ increasing adoption of retail storefronts. This promising interplay between supply and demand is expected to provide continuous support to the sector in the foreseeable future, maintaining vacancy rates at historically attractive levels.
RATES
VACANCY
Source: CoStar Group
■ Mall ■ Neighborhood Center ■ General Retail ■ Other Retail ■ United States ■ Power Center ■ Strip Center 2022 2018 2017 2023 2019 2024 2020 2026 2027 2025 2021 7% 10% 6% 9% 8% 5% 4% 3% 2% 1% Forecast YEAR VACANCY RATE 2019 4.5% 2020 4.9% 2021 4.9% 2022 4.4% 2023 4.2%
Source: Statista
national
markets 12-Month Rent Growth and Vacancy Rate Source:
Source: CoStar Group
Group 12-MONTH RENT GROWTH AND VACANCY RATE
CoStar
5.00% 6.00% 1.00% 0.00% 2.00% 3.00% 4.00% Vacancy Rate Rent Growth 10% 8% 14% 12% 6% 4% 0% 2% -2% -4% Boston Austin Tampa Seattle San Francisco Fort Lauderdale Jacksonville Phoenix Nashville Atlanta East Bay Honolulu Miami Orange County Minneapolis San Jose San Diego Cleveland Dallas-Fort Worth Chicago Baltimore Denver New York Houston MARKET VACANCY RATE RENT GROWTH Atlanta 3.60% 6.90% Austin 2.90% 6.90% Chicago 5.30% 3.10% Cleveland 4.40% 7.00% Dallas-Fort Worth 4.50% 4.20% Denver 4.10% 1.90% Los Angeles 5.40% 1.30% Fort Lauderdale 3.40% 10.30% Jacksonville 4.30% 12.30% MARKET VACANCY RATE RENT GROWTH Minneapolis 3.20% 3.60% Nashville 3.40% 7.70% New York, N.Y. 4.30% 1.10% Orange County 4.30% 4.20% Phoenix 4.90% 9.00% San Diego 4.30% 5.10% Tampa 3.00% 8.40% Seattle 2.90% 2.40% MARKET VACANCY RATE RENT GROWTH San Francisco 5.60% -0.10% Miami 3.00% 4.90% Boston 2.60% 2.60% Houston 4.90% 4.50% Honolulu 4.20% -1.80% East Bay 5.20% -3.10% San Jose 4.30% 0.70% Baltimore 5.50% 1.10%
rent rankings
MARKET RENT PER SF Source: CoStar Group Atlanta $60 $50 $40 $30 $20 $10 $0 Austin Chicago Cleveland Dallas-Fort Worth Denver Los Angeles Fort Lauderdale Jacksonville Minneapolis Nashville New York Orange County Phoenix San Diego Tampa Seattle San Francisco Miami Boston Houston Honolulu East Bay San Jose Baltimore MARKET RENT PER SQUARE FEET Source: CoStar Group ■ Mall ■ Neighborhood Center ■ General Retail ■ Other Retail ■ United States ■ Power Center ■ Strip Center 2022 2026 2018 2017 2019 2023 2020 2024 2021 2025 $28 $34 $26 $32 $30 $24 $22 $20 $18 Forecast
NATIONAL FUNDAMENTALS
Despite recession worries and reduced consumer spending, the retail industry is expected to maintain a stable outlook in the coming months. Limited availability of retail space and a lack of new supply entering the market will help counterbalance any potential increase in store closures. Limited availability and a substantial increase in retail sales have merged to propel nominal asking rents upward at their most rapid pace in more than 10 years. According to CoStar Group, average triple-net asking rents have increased by 3.6 percent over the past year to a new record high of $24.00 per square foot.
NET DELIVERIES & VACANCY OVER THE YEARS
Investment in retail properties declined towards the end of 2022 due to higher interest rates and increased macroeconomic uncertainty. This slowdown has continued into 2023, with January experiencing the lowest monthly total for retail property sales since the peak of the pandemic. However, investors are still actively targeting the wellperforming segments throughout the retail market, but are more selective of their decisions. ■
Vacancy
ABSORPTION,
2022 2018 2017 2023 2019 2024 2020 2026 2027 2025 2021 40 5.0% 30 4.8% 50 5.2% 20 4.6% 10 4.4% 0 4.2% -10 4.0% -20 3.8% Forecast Absorption & Deliveries in Millions SF Vacancy
Net Absorption ■ Net Deliveries ■
NET
Source: CoStar Group
Key takeaways – Top Performing Retail tenants
1. DISCOUNT CHAINS ARE THRIVING
As food prices continue to soar as a result of unrelenting inflation, discount grocery and retail stores are gaining traction among a wide group of consumers. Aldi and Lidl are two discount grocery chains that have been performing particularly well in this economic environment. Additionally, according to IBIS World, over the last five years, the revenue of dollar and variety stores has experienced a CAGR of 3.9 percent, reaching $114.2 billion. In the first months of 2023, there was a further increase of 1.7 percent, and the profit is projected to reach 4.6 percent by the end of the year. Rise of Convenience Stores
2. RISE OF CONVENIENCE STORES
With consumers resuming their daily commutes and engaging in out-ofhome activities, there is an increase in traffic at convenience stores. C-stores heavily rely on impulse purchases, and vehicle and pedestrian traffic rise influences these consumer behavioral changes
3. DEMAND FOR EXPERIENCES
Consumers now seek more than just products; they want memorable and immersive encounters during their shopping journeys. As a result, retailers are reimagining their stores as interactive spaces, incorporating elements that engage the senses and foster connections. This shift signifies a new era in retail where the focus is not solely on transactions but on creating meaningful and enjoyable customer experiences.
GlobeSt reports a notable increase in the demand for sit-down dining and quick-service restaurants (QSRs). This surge can be attributed to a change in consumer preferences, where people are not only looking to satisfy their hunger but also seeking enjoyable dining experiences.
4. CONSUMERS SEARCH FOR SMALLER FOOTPRINT RETAILERS
There has been a rise in consumers who prefer a smaller, more convenient, retail space. This can be seen in the use of more pick-up windows, drive-up stations, and fast-food restaurants. Consumers want something that is easy to go in and out of, without the need for external service needed.
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