Retail: Resilience is the Magic Word

Key Takeaways:

• Real income and employment gains continue to support consumer spending, though growth has slowed and become more uneven in recent months. 

• The national retail vacancy rate held steady at 5.3% in Q2, the lowest in 20 years. 

• After a decline in Q1 2024, net absorption turned positive in Q2, though year-to-date demand remains 91% below last year's levels. 

• The retail market remains historically tight, a trend expected to continue through 2025 amid a resilient U.S. economy, strong tenant demand, and limited new construction.

The U.S. economy continues to avoid recession, thanks to strong consumer spending. Inflation-adjusted spending rose 2.4% through May, supported by a 1.1% rise in real disposable income. However, consumers are relying more on savings and credit, with the personal savings rate at half its 2019 level and credit card usage at an all-time high. These trends may soften spending as budgets tighten.

Retail absorption remains weakened. The Net absorption rebounded to 1.4 million square feet in Q2 after a negative first quarter. However, year-to-date absorption is just 834,000 square feet, on track for the weakest year since 2020.

Economic Drivers

The U.S. consumer continues to spend thanks to a favorable job market and increases in real incomes. Real personal consumption expenditures increased at a healthy 2.5% rate in the first quarter, even as inflation reaccelerated.

While overall spending remains solid, consumers continue to shift their budgets, resulting in disparate outcomes by sector. Furniture, electronics and appliances, and home improvement categories are generally seeing declining retail sales compared to 2023, while restaurants, e-commerce and mass merchandisers outperform—in both real and nominal terms.

Consumers continue to dip into savings and credit to finance spending. The personal savings rate averaged 3.6% in the first quarter, roughly half the 6.2% average from 2015-2019. Additionally, the share of delinquent credit card accounts is at a 13-year high, as primarily lower-income households remain under financial pressure.

Outlook:

The retail sector remains resilient due to steady demand and limited new supply, even as consumer spending slows. Open-air shopping centers are at a record-low vacancy rate of 5.4%, with a slight increase of 40 basis points expected over the next two years. Robust demand, driven by large retailers planning more store openings than closures, continues to support the market.

The tenant mix is diversifying, with more space being leased by service providers like restaurants, healthcare, and wellness. This shift benefits retail centers as consumers return to service-oriented spending.

New retail supply remains limited, with less than 12 million square feet under construction, meaning high-quality locations will stay scarce. Rent growth is expected to slow, averaging 2.9% from 2024 to 2026, down from a peak of 5.0% in 2022, but landlords of prime locations will retain leverage.

Sources:

• https://www.bea.gov/news/2024/personal-income-and-outlays-july-2024

• https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-states-outlook-analysis.html

• https://www.us.jll.com/en/views/brief-relief-for-retail-space

• https://www.npr.org/2024/09/18/nx-s1-5115909/federal-reserve-interest-rate-cut-inflation

• https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-shopping-center-marketbeat-report

• https://insights.cushmanwakefield.com/story/2024-us-midyear-outlook/page/1

• https://www.fanniemae.com/media/53316/display

• https://www.us.jll.com/en/trends-and-insights/cities/how-real-estate-is-retrofitting-historic-buildings

• https://www.us.jll.com/en/views/landlords-gain-leverage-as-retail-supply-remains-tight

• https://www.wconline.com/articles/96587-commercial-construction-market-forecast-for-2024-25

• https://www.us.jll.com/content/dam/jll-com/documents/pdf/research/2024-midyear-construction-update-and-reforecast.pdf