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Lack of Retail Space Slows Absorption in Q3

Third-quarter data from the major brokerage firms reported ongoing resilience in the retail sector. But a reduction in space delivery continues putting downward pressure on absorption.

On the positive side, the Cushman & Wakefield MarketBeat U.S. National Shopping Center Report for Q3 2023 indicated that “healthy tenant demand and resilient consumer spending” continue to support retail’s solid fundamentals. On the more negative side, the JLL United States Retail Outlook Q3 2023 claimed that “limited supply is a drag on leasing activity.”

The JLL report noted the lack of available space in “desirable locations,” predominantly due to higher construction costs and destruction of obsolete space. According to the CBRE Q3 2023 U.S. Retail report, “the overall retail availability rate fell to at least an 18-year low.” The lack of space and lower construction deliveries are also impacting absorption, with Lee & Associates’ Q3 2023 Retail Review noting that this metric is “about 25% behind average growth of the last two years.”

Less space combined with “the significant boost in retail sales coming out of the pandemic,” from Lee & Associates analysts, leads to an increase in asking rents. The Lee & Associates report pointed out that the space demand comes primarily from discounters. JLL agreed, adding that quick-service restaurants, fitness companies and experiential tenants are also taking down space.

In focusing on the sector’s outlook, CBRE analysts indicated a moderation in asking rent growth, suggesting that “landlords believe demand could ease in coming quarters as the U.S. economy slows.” There’s little doubt that consumers face challenges, including higher gas prices, resumption of student loans and increasing credit-card debt.

But Cushman & Wakefield analysts were more optimistic while acknowledging a challenge in the macro environment. “While there will be a period of softness, it’s more likely to be a blip compared to the disruptions over the past decade,” they said. “If a global pandemic couldn’t destroy retail, then a recession certainly won’t either.”

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