Retail

Retail Fundamentals to Remain Strong

Retail real estate fundamentals are expected to remain strong in 2024 due to the long-running dearth of new construction deliveries over the past several years. The retail availability rate is expected to fall by 20 basis points and end the year at 4.6%. Asking rent growth will dip below 2% for the first three quarters of 2024 but rise above 2% in Q4. Demand for open-air suburban retail centers will increase at a faster pace than other retail formats, as traditionally mall-based retailers explore new formats for expansion.

High costs in 2023 discouraged construction starts and will ensure the scarcity of new development deliveries in 2024. Quoted construction costs currently range from $300 per sq. ft. for a junior anchor box to $500 per sq. ft. for a multi-tenant pad site. Only a few markets can demand asking rents that are high enough to justify the new construction. CBRE’s Cost Consultancy Group reports that retail construction costs rose by 6.5% in 2023 and are expected to increase further in 2024, albeit at a slower rate. Only a few markets can command asking rents that are high enough to justify new construction.

Figure 10: Historical & Forecast Retail Construction

Consumer Spending Will Moderate

Consumers will face certain headwinds in 2024, including a lack of affordable housing, high interest rates and the resumption of student-loan payments. The National Association of Realtors Home Affordability Index fell to a 29-month low in August 2023, while the Federal Reserve Bank of New York estimates almost $1.6 trillion of outstanding student-loan debt. This likely will curb discretionary consumer spending in coming years.

CBRE Research forecasts that retail sales growth will moderate to around 2.6% in 2024. Asking rent growth is expected to decrease in early 2024 but rebound in the second half of the year.

Figure 11: Retail Sales & Asking Rent Growth

Open-Air Centers to Take Demand From Malls

Net absorption of retail space is expected to fall to 28 million sq. ft. in 2024 from 35 million sq. ft. in 2023. Nevertheless, the retail availability rate is expected to reach a record-low 4.6% due to a lack of new supply. Only 14 million sq. ft. of new multi-tenant retail space is scheduled for delivery in 2024—half the amount of projected demand.

Not all retail formats will prosper in 2024. Retailers that have traditionally been mall-based have been closing underperforming stores and are now looking to smaller-format open-air suburban centers for expansion. Neighborhood, community & strip centers will maintain stable occupancy throughout 2024, but availability rates for mall & lifestyle centers will rise by nearly a full percentage point.

Figure 12: Historical & Forecast Retail Availability & Absorption

Luxury Brands Look Farther Afield

Luxury brands that once focused only on space in high-street districts such as Beverly Hills’ Rodeo Drive, New York’s Fifth Avenue and Miami’s Design District are taking fresh looks at resort markets like Las Vegas, Honolulu, Charleston and West Palm Beach. With a slowing Chinese economy, expansion-minded luxury retailers will return to the U.S. for expansion. Texas markets like Dallas and Houston that have long been underserved by high-end brands will see new interest.