Retail Q3 Update

by | 11 November 2021

  • Retail is performing better than expected on the back of strong consumer spending.
  • Store openings are outpacing closings. Planned store closures are at decade lows.
  • Leasing has been driven by discounters, grocers, beauty supply, and apparel.
  • Markets in the Southeast and Southwest are benefitting from retail expansion targeting favorable demographics.
  • Investment sales are broadening to include shopping centers because of improved fundamentals.

The resiliency of the retail industry continued into the third quarter of 2021 as consumers pushed retail sales to record levels and retailers focused on expansion. Total retail sales reached $1.9 trillion in the third quarter as consumers continued their retail spending spree, up 14.8% from 2020 and 19.2% from 2019. Shopper foot traffic is returning to pre-pandemic levels in certain retail segments, and the easing of COVID-19 restrictions has also helped to slow the pace of store closures and U.S. corporate bankruptcies, which are at a record low since 2014.

The national vacancy rate for all retail space, at 4.7% in the third quarter, decreased 40 basis points quarter-over-quarter. A combination of pent-up demand and new store openings led to more than 20,000 new leases being signed in the third quarter, for over 60 million square feet with an average footprint of just over 3,000 square feet.  Pockets of challenges remain, particularly storefront retail in urban centers. The most active industries were led by discounters, grocers, beauty supply, and apparel retailers. Meanwhile, new construction has been limited.

Over 30 million square feet of retail space was absorbed in the third quarter, double the amount in the previous quarter and the highest figure recorded since 2017. Retailers continue to target metros with rapidly increasing populations such as Orlando, Las Vegas, Houston, Austin, and Charlotte. Additionally, metros in the Southern and Western regions have the strongest absorption gains as they continue to outperform the nation as a whole in population growth.

Positive momentum in leasing and absorption drove overall retail rent growth of 1.2% over the quarter, to $22.28 per square foot. While rent collections rose for national tenants, collections dropped for non-nationals at the end of the third quarter. Alignable reported that 35% of small business retailers in the U.S. cannot currently afford their rent.

As the retail industry evolves, investment opportunities will emerge. Some stats to consider: by 2025 we estimate that 30.5% of all digital transactions will be fulfilled by a physical location, while one-third of physical store space will be reallocated to fulfill online orders. Omnichannel is here and it will continue to evolve.