The retail industry remained in expansion mode in 2022 as consumers and retailers remained resilient despite concerns over inflation, interest rates, and a potential recession. Tenants signed leases for over 193 million square feet of retail space during the year, driven by the growth for smaller spaces, as the average footprint leased hovers near the all-time historic low of just over 3,000 square feet. In addition, retailers only shuttered 20 million square feet of retail space during the year, the lowest total recorded since the Great Financial Crisis. The combination of strong leasing volumes and a significant reduction in move-outs drove net absorption to its highest levels in six years at 80.5 million square feet.
Total retail sales increased by 9.2% in 2022, the equivalent of Americans spending $683 billion more than they did in 2021, as rising prices due to inflation weighed heavily on consumer sentiment. Retail availabilities declined in 2022 as the demand for quality space rose, and new retail deliveries remained minimal. The overall vacancy rate stood at 4.2% at the end of the year, decreasing by 40-basis points year-over-year, with grocers, discounters, off-price retailers, and experiential tenants driving activity.
“The average lease size will continue to decline as retailers look to shrink overall footprints and expand with smaller-format store concepts, maximizing their impact in each market while lowering costs.”
Trends to Watch in 2023
- Retailers Eye Emerging Markets: Motivated by the pandemic, people prioritized quality-of-life considerations and migrated from larger urban areas. This shift has boosted many cities in the South and West regions of the U.S. into top-ranking commercial real estate markets and has increased demand for quality retail space in tertiary submarkets.
- Shrinking Requirements: The average lease size will continue to decline as retailers look to shrink overall footprints and expand with smaller-format store concepts, maximizing their impact in each market while lowering costs. The average lease term is also contracting, with momentum growing for three to five years of term as retailers try to remain flexible and maintain leverage over landlords.
- Core Retail Remains Attractive: With persisting inflation expected to push the U.S. into recession, grocery-anchored retail assets will remain a source of stability within the sector due to their importance to consumers and relatively low competition from e-commerce.
- Evolving Store Formats: The importance of omnichannel services will force retailers to consider new store formats, including more space for fulfillment and a deeper merchandise assortment, and will allow consumers to shop both online and in-store.
- Central Social Districts: As the return to office continues to languish, look for Downtowns to embrace the idea of a central social district. Residential and other complementary uses can bring more foot traffic and spending to retail stores during the daytime.
U.S. National Retail Forecast
- Vacancy: The U.S. retail vacancy rate will stabilize during the first part of the year as the rapid leasing of the past two years loses momentum. Suburban markets will continue to attract greater leasing volume, however, as many urban markets struggle with recovery.
- Demand: Net absorption will begin to decline in 2023 specifically in the mall segment as availabilities remain higher than before the pandemic. Overall demand will still be positive for shopping centers and freestanding single-tenant properties. And retailers will extensively research potential locations and use sales and location-tracking technology to pinpoint where new stores will succeed and what size footprint is needed.
- Construction: The oversupply of retail inventory is stabilizing, since more than 80 million square feet of existing retail space has been demolished in the U.S. since 2019 as properties are re
–purposed. The lack of quality retail supply will compress the availability rate and slow store openings and starts on new projects have fallen to their lowest levels in decades.
- Rents: Minimal new retail supply plus positive demand growth in many of the major U.S. markets are expected to push rents higher this year. Although this will bring nominal rent gains to retail owners in strong locations, inflation will continue to weigh on the real rate of rent growth.