The retail industry remained in expansion mode, as tenants leased over 250 million square feet of retail space in 2023. Leasing activity followed consumer spending patterns, as retailers increased their space needs in response to rising demand, including food and beverage, fitness, experiential, discount, health and beauty, and medical services. Each of these expanding sectors has benefited from the pivot in consumer spending toward value, wellness, and experiences. Additionally, retailers announced 5,865 store openings in 2023 compared to 4,070 closings, primarily driven by retail bankruptcies.
Continued expansion in the sector drove retailers to absorb 53.8 million square feet of retail space last year, exceeding the 41.1 million square feet of newly delivered retail supply. Most of the demand stemmed from retailers’ desire to be closer to the consumer, with freestanding and neighborhood retail properties collectively accounting for 95% of all retail growth over the past year.
While retail market fundamentals remain strong, persistent challenges of securing desirable locations due to limited space availability caused a notable downshift, leading to more sustainable growth levels in 2023. In addition, minimal development activity over the last decade continued to apply downward pressure on vacancy, dropping the U.S. retail vacancy rate by 20 basis points year-over-year to 4% at the end of 2023.
Trends to Watch in 2024
- Store Expansion: Nearly half of U.S. retailers plan to expand their physical footprint over the next five years, with grocers the most bullish about expansion plans. Additionally, apparel and mass merchants are adding new stores to emerging markets in response to high consumer demand.
- Considered Consumption: Consumers will remain considerate in their purchasing habits by researching prices and products and using a more comprehensive number of retailers to get the right product and price, stabilizing total retail spending growth to 3.3 percent at the end of 2024.
- Challenges to Open: While supply chain challenges have eased over the past year, the retail sector grapples with a lack of quality space, high construction costs, inflation, and labor shortages. On the bright side, inflation should continue to ease, falling to around 2.5% by the end of 2024.
- Rising Online Sales: E-commerce is expected to drive retail sales for the foreseeable future, accounting for 20% of total retail sales by 2027. Additionally, U.S. retail social commerce sales will total $82.82 billion, growing 23.5% year-over-year in 2024.
- Improving Efficiencies: Retailers plan to invest heavily in automation within their stores and warehouses over the next few years to boost operational efficiency, leading to reduced costs and higher profits. Artificial intelligence deployment is expected to increase nine-fold in the next two years.
U.S. National Retail Forecast
- Vacancy: Anticipated to be influenced by a slowdown in leasing activity as retailers deal with the lack of available quality space, the U.S. retail vacancy rate is projected to rise by ten basis points in 2024. Leasing activity will remain focused on smaller spaces under 3,000 square feet, with the driving force being the expansion of quick-service restaurants.
- Demand: In 2023, retail absorption outpaced new deliveries, but projections for 2024 indicate a stabilization, with the likelihood that new supply will surpass demand. The desire to expand remains robust, and we expect retailers to sustain their expansion efforts as they seek to increase geographical reach and market saturation.
- Construction: Limited nationwide construction has significantly contributed to rebalancing the retail market, with an anticipated 25% increase in new retail space delivery to approximately 52 million square feet in 2024, including freestanding general retail properties, ground floor retail spaces in larger mixed-use developments, and small strip centers.
- Rents: Notable variations in rental performance are expected, with rapidly expanding markets in the Southern and Western regions of the U.S. anticipated to maintain strong rent growth. Guided by enhanced pricing power in a constrained space market, retail landlords will exercise selectivity with new tenants and firm rent negotiation stances.