As the first half of 2024 unfolds, the U.S. retail market continues to exhibit resilience in the face of varied economic headwinds. The second quarter has provided both challenges and opportunities for retailers, with the landscape marked by constrained leasing activity due to limited space availability and rising operating costs. However, the retail sector is navigating this tightrope with agility as U.S. store openings currently outpace closures by 20%.

Small Spaces and Big Move-ins Drive Market Trends

The national retail vacancy rate has held steady at 4.1% throughout the first half of 2024, sustained by rising demand, fewer tenant bankruptcies, and a restricted supply of new retail spaces. Notably, demand for retail space has surged by 54 million square feet over the past year, with significant contributions from sectors such as food and beverage, discount retailers, off-price segments, and experiential offerings.

Leasing activity in the U.S. retail sector is predominantly concentrated in smaller spaces under 2,500 square feet, notably driven by quick-service restaurants and personal services. Tenants such as Starbucks, Crumbl Cookies, Yum Brands (The Habit Burger Grill, KFC, Pizza Hut, Taco Bell), and Restaurant Brands International (Burger King, Tim Hortons, Popeyes, Firehouse Subs) have significantly expanded, opening numerous new locations over the past year. This expansion correlates with an unprecedented surge in spending on dining outside the home, elevating the food and beverage sector to account for nearly 20% of all leasing activity.

Additionally, demand in junior and anchor spaces spans various sectors, including discount and health and beauty, with the experiential sector—led by tenants like Planet Fitness and Urban Air—growing to represent about 15% of leasing activity, a notable increase from previous years.

Active Demand and Targeted Development

The retail market experienced net absorption of 7.2 million square feet in the second quarter, indicative of an active market where available spaces are being leased at an above-average pace. For example, the average time from when a space becomes available to securing a tenant has declined to just 8.5 months, the quickest pace recorded in over two decades.

Construction activity within the retail sector totaled 50.4 million square feet, with 6.5 million square feet delivered in the second quarter alone. The focus has predominantly been on build-to-suits, grocery-anchored centers, and smaller retail formats within mixed-use projects. Despite a decline in construction starts due to elevated construction and financing costs, new retail properties are enjoying higher-than-average leasing rates.

Retail Rent Dynamics

Overall average retail asking rents have modestly increased to $34.12 per square foot, a growth of 0.3% over the previous quarter, while mall rents have increased by 0.4% and shopping center rents by 0.7%. Despite an anticipated slowdown in rent increases, fast-growing metropolitan areas and well-positioned smaller spaces along key corridors are likely to perform exceptionally well. Rent levels for long-term leases are expected to stay at their highest in decades throughout 2024.

Landlords are experiencing enhanced pricing leverage due to a reduced supply of competitive spaces. Market feedback indicates a heightened selectiveness regarding new tenants and a stronger resolve in rent negotiations. Although top-line growth remains robust, rising costs for tenant improvements offset these gains, thereby constraining improvements in landlords’ net earnings.

As we move into the second half of 2024, the U.S. retail market is poised to continue its cautious yet opportunistic path. Retailers and investors must stay vigilant, adaptable, and forward-thinking to effectively navigate the ongoing economic fluctuations and capitalize on emerging opportunities.

Download the U.S. Retail Market Statistics infographic here: 2Q24 Retail Stats