The retail sector remains in expansion mode despite growing economic uncertainty from inflation and rising interest rates. At the end of the third quarter, core retail sales, excluding gasoline, auto vehicles, and food service, increased by 7.2% on a year-over-year-basis. Retail spend may not be as high as it was a year ago, but overall foot traffic is up for fitness and discount retailers. However, mall foot traffic saw a slight downturn. A more cautious mindset is setting in as households continue to shift their shopping patterns and try to balance their budgets to cope with inflation. As a result, full-service restaurants have bore the brunt of tighter consumer budgets.
The national retail vacancy rate dropped 10 basis points during the third quarter and stands at 4.3%, as retailers remain in growth mode as store openings continue to outpace closures. Average retail asking rents rose to $23.52 per square foot in the third quarter, an increase of 1.1% over the quarter. Though nominal rent growth has been strong, the real rate of growth has failed to keep up with inflation since the start of the pandemic. Retailers signed around 18,000 individual leases spanning 58.1 million square feet in the third quarter, with the average deal size decreasing by 1.7% year-over-year as the demand for smaller spaces progresses.
“The national retail vacancy rate dropped 10 basis points during the third quarter and stands at 4.3%. Retailers remain in expansion mode as store openings continue to outpace closures.”
Nearly 17 million square feet of space were absorbed in the third quarter, with half of the absorption flowing into general retail while malls posted negative absorption for the first time in 2022. Retail space under construction stands at 61.5 million square feet, with 8.3 million square feet of new retail space delivered in the third quarter of 2022. 82 million square feet of existing retail space has been demolished in the U.S. since 2019 and the lack of new retail supply will compress the availability rate and slow down retail openings.
With the third quarter over, retailers now enter the critical golden quarter. It is anticipated that the year will end on a reasonable note, although we caution that the boom times of 2021 will not repeat themselves. Retailers will have to work hard for profitable gains over the holidays, as retailers increase their promotional spend while continuing to discount over-stocked merchandise. Ultimately this will take its toll on retail volumes and retailer margins and profitability heading into the new year.