• Retail fundamentals continue to improve.
• Vacancy fell to 4.5% in the first quarter, while rents are up 5.5% year-over-year.
• Announced store openings outpace closings by nearly seven to one.
• Demand is strongest in Sun Belt markets.
• Higher going-in cap rates have kept retail transactions flowing.

Retail’s underlying strength continued into the spring. The National Retail Federation reported that during the first quarter retailers announced plans for 4,400 new stores, which is in line with 2021 figures. Meanwhile, just 635 store closures were announced, well below the 2,100 figure one year prior. Until 2021, closures had outpaced openings for several years running. These new stores, however, generally fall into the discount or dollar segment of the market, led by Five Below, Family Dollar, Dollar Tree, and Dollar General. TJX brands, Burlington, and Ross Stores in the off-price segment also announced numerous store openings.

This bodes well for future absorption and demand for retail space. Nationally, vacancy dropped to 4.5% in the first quarter, and the best gains were in markets with the strongest demographics and migration trends in the Southeast and Southwest, such as Phoenix, Tampa, Atlanta, Dallas, and Houston. Rents are up 5.5% over the past year, while development remains constrained, which should help to further bolster fundamentals in the quarters ahead.

Inflation remains a question mark for retail. How this impacts consumer spending is still playing out: retailers from Target to Walmart have seen stock prices fall over concerns of lingering inflation and the effects on margins and profitability. The most recent retail sales data shows an overall gain of 8.7% through April, with gas spending up 37.2% due to higher prices at the pump. GlobalData reports that retail spending grew 34.4% from the same time in 2019.

Investors are still active in the retail space, with centers trading more frequently and capital taking on more risk. Most buyers are private and significant capital is tied to 1031 exchanges. Some of the largest deals in April were for properties with a planned redevelopment. Going-in cap rates are higher in retail than in other asset classes, averaging in the mid-6% range. This has so far insulated retail (at least compared to other asset types) from rising interest rates.

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