Positive in-store sales growth, increasing profit margins and recovering foot traffic are the fundamental forces driving the retail sector’s positive momentum in the first quarter of 2022. Core retail sales, excluding automotive and gas, have grown by 8.6% year-to-date, and much of the growth is coming from higher prices that shoppers are forced to pay rather than willingly going out and spending more. Service sector tenants, such as movie theatres (207.9%), salons (56.1%), restaurants (54.3%) and fitness (53.5%), all saw healthy upticks in sales per square foot growth in the first quarter. Foot traffic is still recovering from the Omicron variant but is trending up and may reflect additional upside to in-store spending as it continues to improve.

Retailers signed nearly 20,000 individual leases spanning more than 65 million square feet in the first quarter of the new year, which dropped the national vacancy rate down to 4.5%. 24.3 million square feet of retail space was absorbed in the first quarter as retailers focus on rapid expansion plans in faster-growing U.S. markets located in the Southeast and Southwest, such as Phoenix, Tampa, Atlanta, Dallas and Houston. The strong recovery in leasing activity over the past year, together with limited construction of new retail space and a sharp drop in store closures, has improved the overall performance of the retail sector.

Although nearly five million square feet of retail space were delivered in the first quarter and an additional 52.3 million square feet are currently underway, overbuilding is not a threat to the retail sector. Developers and local municipalities have demolished over 118.5 million square feet of retail space since 2017, as older big boxes are replaced with new, mixed-use properties. Most development activities involve freestanding general retail properties that are pre-leased to national tenants, with nearly 75% of under construction retail space pre-leased as of the end of 2021.

Positive trends in leasing and absorption have driven overall retail rents to increase by 5.5% over the year and stand at the end of the first quarter at $22.91 per square foot. Retail rents are forecast to grow by just over 4% in 2022, the fastest growth rate recorded in nearly two decades. This above-average pace of growth is supported by higher inflation expectations, with Oxford Economics forecasting consumer price increases of 4.4% over the same time.

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