The first quarter of 2024 was marked by notable tightness in retail fundamentals, driven by a significant decrease in new space entering the market due to tenant move-outs and a long-term trend of minimal supply additions. At the end of the first quarter, March retail sales ended on a solid note with a 2.4% increase, although the gains were somewhat lifted by an early Easter, boosting sales by an estimated $7.4 billion.

Core retail sales, excluding foodservice, motor vehicles, and gas stations, saw a healthy uptick of 3.2%, reflecting sustained consumer spending outside of these volatile segments. Non-store retail categories continued to perform strongly, with online retailers marking a 5.6% increase, underscoring the shift towards digital consumption patterns.

Vacancy, Leasing and Absorption: A Tight Squeeze

The national retail vacancy rate edged up slightly by ten basis points to 4.1% in the first quarter of the year. Retail leasing activity fell to 43 million square feet in Q1 2024, a 27% decrease from the previous year, due to limited space availability and rising operating costs affecting demand. Despite this, leasing activity remains above its historical pace, indicating a complex interplay of supply and demand factors in the market.

While new supply accounted for the minimal rise in vacancy, the market absorbed 3.1 million square feet, pointing to robust underlying demand that continues to outpace supply constraints. Shopping centers held steady with no change in vacancy rates from the end of 2023, suggesting a balanced dynamic in this segment. Meanwhile, malls saw a negligible increase in vacancies, up ten basis points.

Asking Rents: On the Rise

Amid these tight conditions, the average retail asking rent climbed to $24.92 per square foot, marking an increase of 0.9% from the previous quarter. This rise is partly attributed to the heightened build-out costs, which, despite strong top-line growth, are impacting landlords’ profitability margins.

Retail rent growth is expected to slow in line with a forecasted moderation in consumption.  Diverse rental performance will persist, with fast-growing metros in the Southern and Western U.S. and smaller spaces in prime locations likely to outperform. Additionally, given the recent rapid rent increases, the difference in rent prices between older leases (those signed five or more years ago) and current rates are expected to remain unusually high throughout 2024, reaching levels not seen in many years.

Construction and Delivery: Building Forward

Construction activity remained robust, with 51.1 million square feet of retail space under development and 9.4 million square feet of newly delivered retail supply. However, less than a quarter of this newly delivered space was available for lease by the end of the first quarter, highlighting the swift absorption rates and the ongoing appetite for premium retail spots. Download the U.S. Retail Market Statistics infographic here: 1Q24 Retail Stats