The retail industry defied expectations and avoided a recession in the first half of 2023, thanks to gains in consumer spending driven by cooling inflation. Though there has been a slowdown in growth and pressure on profits and margins, U.S. retail sales expanded at the end of the second quarter by a modest 1.7%. Consumers currently have more of a desire to spend on experiences such as travel and dining out, which is one of the reasons food service sales increased by a robust 9.9% in June.
The national retail vacancy rate remained unchanged during the second quarter and stood at 4.2%. Consistent leasing activity and a significant slowdown in move-outs have contributed to a positive demand environment across the U.S. retail sector. Average retail asking rents rose to $24.22 per square foot in the second quarter, an increase of 0.9% over the quarter. Minimal availability and rising sales have pushed retail rents at the fastest clip in a decade, though the pace of growth has moderated over the past two quarters.
The lack of available retail space in desirable locations contributes to the recent pullback in leasing activity. Retail tenants signed for approximately 42 million square feet of space in the second quarter of 2023, the lowest level recorded since the beginning of the COVID-19 pandemic in the second quarter of 2020. Other factors contributing to the pullback include a more challenging operating environment, lack of available labor, and a rise in uncertainty surrounding the outlook for consumption.
Retail space under construction stands at 62.1 million square feet, with 8.9 million square feet of new retail space delivered in the second quarter of 2023. The retail market experienced 10.5 million square feet of absorption in the second quarter of 2023. For the second quarter in a row, absorption exceeded the amount of new supply as retailers continued to expand. Most recent new retail space consists of build-to-suits or smaller freestanding properties, with nearly 80% of new retail space delivered over the past year leased before delivery.