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Retailers Show Signs Of Turnaround As Availability Hits Record Low

In a small reversal of their long-running miserable fortune, retailers and their real estate seem to be experiencing a slight rebound, or at least a slower contraction as the holiday season approaches, according to industry metrics.

Available retail spaces are getting tough to come by, according to a CBRE report indicating that U.S. retail availability fell by nearly a full percentage point year-over-year to 5% in Q3 2022, the lowest level since the company began tracking this metric in 2005.


That shortage of available space is creating more favorable conditions for retail landlords and shopping center operators and making it more difficult for tenants to get a good deal, unless they’re coming from a strong financial position, The Shopping Center Group Executive Vice President Nichole Popovics said.

“The best leverage for a tenant is having a solid balance sheet and a proven track record," Popovics said, adding that flexibility in design and layout is also important in the hunt for space.

The dynamics that led to this short supply of retail space were years in the making. Burned by the Great Recession and stuck with a huge backlog of empty retail space, developers in many large metro areas were slow to jump back in the pool when the economy began improving again and other development types took off in 2013 and 2014.

Retail projects were beginning to make a comeback when the pandemic slapped them back down in 2020, closing down restaurants and evaporating every office worker’s need for new pantsuits.

Now, CBRE says, the high interest rate environment, combined with pricey construction materials and sparse labor, have warded off potential new development, keeping supply constricted.

Year-to-date store openings in November are almost equal to 2021, while store closures are down by about 55%, which has had the effect of keeping net absorption positive, according to Coresight

One more positive metric: Retail properties passed an important milestone at the midpoint of 2022, with national vacancy rate returning to levels recorded in 2019, Marcus & Millichap reports

Physical retailers are being aided by the labor recovery, the company posits. In July and August, the addition of 841,000 workers pushed the employment base beyond the previous pre-pandemic high. 

The context for renewed absorption is that physical-store retail sales have clawed back some of their early pandemic losses.

In October, U.S. retail sales excluding gasoline were up 7.4% compared to the previous year, according to data released Thursday by the Census Bureau. Just one month earlier showed virtually stagnant year-over-year retail sales growth. 

Almost every category of retail enjoyed increased sales year-over-year in October, including standouts such as building material and garden supplies (up 9.2%), grocery stores (up 8%) and miscellaneous store retailers, which includes dollar stores (up 10.4%).

There were a few losers, however: department stores, long the Charlie Brown of modern retail, saw sales drop 1.6% for the year, while electronics stores sales dropped much more, 12.1%.


And of course, retail still faces steep challenges.

Despite these relatively strong recent numbers, economic nervousness could derail even a modest retail recovery, via continued inflation, a 2023 recession or some combination of both not seen since the 1970s.

"Consumer spending on discretionary items is starting to slow, as months of high inflation in staples have reduced excess savings, and the prospect of inflation’s impact on corporate earnings has erased months if not years of growth," said Michael Brown, a partner and Americas retail leader at Kearney.

In the third quarter, real disposable income and consumer spending remained largely unchanged compared with the second. Consumer confidence remained relatively stable in the summer of 2022, but dropped in October.

For now, retailers are sitting on excess inventory from spring and they can’t afford to compound the problem with the additional backlog of fall goods, Brown said.

"Promotions will be aggressive and will continue up to Christmas Eve and beyond," he said.

Overall, retail performance is caught in a push-pull dynamic between pent-up demand and heightened inflation pressure, according to a study by Moody's Analytics Senior Economist Lu Chen and economist Xaiodi Li.

Despite some signs of stabilization, regional mall properties continue to be the most at-risk retail subtype according to Moody's commercial mortgage delinquency data, and they are driving overall delinquency among retail assets, according to Chen and Li.

Whatever the direction of retail nationwide next year, there will be stronger and weaker markets. Some markets have actually thrived in the time since the pandemic restrictions were lifted, such as Phoenix, which has seen strong population growth in recent years.

“Metro Phoenix continued to see explosive population growth throughout the pandemic and consumers are now falling back into familiar shopping patterns," Colliers Executive Vice President Brian Woods said. "As always, retail follows rooftops."

And New York, hit hard by the pandemic, has shown retail resilience recently, which JLL Executive Vice President for Retail Brokerage Matt Ogle believes will continue.

"In New York, our hope is that we see continuation of the momentum," Ogle said. "It's been a positive year for retail and retailers are considering new opportunities, but not over-expanding. Many retailers are trying to figure out right now how big they want to be."

Others are expanding on new concepts to buttress revenues.

"Food and beverage tenants are growing in different ways too," Ogle said. "I just finished the tour with a tenant that wants to do a traditional 2K SF restaurant, but underneath it they want a 3K SF to 4K SF commissary because their delivery business is so strong."