US retail real estate rises from the ashes

Asking rents soar, vacancies hit 15-year low in Q2

(Photo Illustration by The Real Deal with Getty Images)
(Photo Illustration by The Real Deal with Getty Images)

The onset of the pandemic sent retail real estate through the ringer, first with lockdown-imposed closures before the rise of e-commerce inspired predictions of doom.

But the market climbed to new heights earlier this year as asking rents are soaring and vacancies are declining across the country, according to a second quarter report from Cushman & Wakefield reported by the Wall Street Journal.

Retail vacancy dropped to 6.1 percent in the second quarter. The rate was the lowest the country has seen, not only since the pandemic, but in the past 15 years.

CoStar told a similar story in August, when an analysis of its data revealed retail availability below the rate it was at during the start of the pandemic and even the Great Recession. The apparently high interest in retail space sets the sector apart from inventory-heavy markets like offices, whose value has been gouged as they face a slower, and uncertain, recovery.

Meanwhile, retail asking rents are moving in the opposite direction of plunging availability. Asking rents at shopping centers were 16 percent higher in the second quarter than they were five years ago. Last year also marked the first time more stores opened than closed since 1995, according to Morgan Stanley.

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A key factor in the improving metrics in the retail market is the downward adjustment in new construction. Building started dropping a decade ago as demand for malls fell and prominent retailers entered bankruptcy. As a result, the oversupply in the market eased.

Companies are seeking opportunities to expand their physical retail presences as shoppers return. Ralph Lauren and Cartier are among the companies looking to open more locations in the coming years.

Retail real estate is not out of the woods, though. Inflation and recessionary fears could still have a negative impact on how much shopping consumers are doing, and in turn, how successful retail outlets are. While some companies are expanding, others are contracting in a significant way.

Bed Bath & Beyond announced in late August it would be closing hundreds of stores and laying off a sizable portion of its workforce. The recognizable home brand has struggled with slowing sales, a stock market decline and tumultuous leadership change.

— Holden Walter-Warner