The State of Retail | Spring 2022

Due to active consumer spending over the last year, retailers have been hitting their highs in the first quarter of 2022. Retailers have moved back into expansion mode, but more cautiously than during other expansion eras. One might ask if, despite increases in retail expansion, will there still be an oversupply of retail space? While demand may have grown, construction activity has fallen. Costar reports that of the 13 million square feet of retail space delivered during the first quarter, 80% of that space was pre-leased. Large speculative retail projects are minimal and most construction activity is for single-tenant build-to-suits. In addition to a slow down in construction, retail demolitions have been picking up, with 26 million square feet demolished in the last year, and 7 million square feet of retail space demolished just in the first quarter of 2022 alone.* So, increased retailer demand, a decrease in construction, and the demolition of existing square footage have given an overall increase in retail absorption.

Retail leasing activity accelerated in the first quarter of 2022, still just slightly below pre-pandemic levels. With growing demand and minimal new deliveries, the vacancy rates in retail have decreased in 2022's first quarter. Small to mid-sized centers and freestanding single-tenant properties continued to have higher occupancy. Retailers have been decreasing their footprint and leasing smaller spaces. The average retail footprint is now 3,000 square feet, a historical low*. Regional and super-regional malls tended to have lower occupancy but were still 200 basis points greater than pre-pandemic levels.* Conversely, malls, and centers that are rated 3 stars and below are having difficulty filling vacancies, as are class B and C malls in tertiary markets that lost anchor tenants before and during the pandemic.*

With retail sales and inflation rising, so are retail asking rents. Average triple-net asking rents are $23/square foot nationally.* With inflation rising rapidly throughout the world, rent growth is forecasted to keep in line with, or slightly below, the rate of rent growth seen during the five years before the pandemic. The retail segment categories seeing the most growth and increase in demand are quick-service restaurants, discounters, big-box retailers, home goods and décor, home improvement, and, of course, grocers.*

Sales of retail properties remain strong. According to Costar, The first quarter of 2022 had the second-highest quarter for sales volume out of any quarter since 2007. Investors are aggressively seeking out single-tenant net-leased assets as well as neighborhood shopping centers that are grocery anchored. With interest rates rising there is a potential threat of a slowdown in retail capital markets; however, with the amount of liquid capital chasing deals, this potential slowdown may be muted. If a slow down in transactions is seen in retail asset sales, the individual asset’s ability to increase rents with escalations, percentage rent clauses, and/or lease expirations/renewals will help mitigate the threat.