For the data behind the commentary, download the full Q3 2024 U.S. Retail Report.
Soft Landing for Consumers
The U.S. macro outlook narrative has increasingly shifted to one in which many economists expect a “soft landing” to be achieved—meaning that economic growth remains resilient while the Federal Reserve recalibrates interest rates to a lower level and inflation becomes less of a concern. This outlook is far from a guarantee given the bevy of economic and geopolitical risks at play. It primarily depends on the assumption that the labor market—and consequently, consumer spending—will not experience a sudden downturn. Recent economic data support this view:
- Estimates of personal income and savings through mid-2024 were revised sharply upward, suggesting that households are in a more solid position to withstand financial headwinds.
- Job growth exceeded expectations in September as the private sector added 202,000 jobs during the month—nearly half of which came in the retail trade and leisure and hospitality sectors.
- Headline consumer price inflation decelerated on a year-over-year (YOY) basis to 2.5%, giving the Fed enough confidence to lower interest rates by 50 basis points (bps) in September. While lower interest rates are not a cure-all, they will help households reduce their debt burdens on adjustable-rate loans and incrementally support activity in the housing and automotive sectors.
Inflection Point or Just a Blip?
Absorption was marginally negative (-258,000 sf) in the third quarter, but some of this weakness can be attributed to the knock-on effects of Hurricane Helene. The South region accounted for -1.8 msf of absorption in Q3, which is a dramatic reversal from the 5 msf absorbed over the prior four quarters. More than three quarters of the markets in the South had negative demand in Q3, including many of the particularly hard-hit areas. While the lingering storm damage may not allow an immediate rebound in retail absorption, we believe the Q3 numbers are not fully reflective of market dynamics. All three other regions of the country registered positive demand, led by the West region (+878,000 sf), which rebounded from two quarters in a row of net negative absorption. Notably, many markets with large urban centers saw positive demand in Q3, including San Francisco, Dallas/Ft. Worth, Boston, Chicago, New York City and Washington, DC. Los Angeles was the only gateway market to buck the trend, with -375,000 sf net absorption in Q3.
Availability remains historically tight as the national vacancy rate for shopping centers held near a historic low of 5.4%. New construction remains subdued, and 2024 is on pace to be the weakest year for new construction on record. With only 11 msf currently under construction in a market of 4.3 billion square feet of inventory, there is virtually no supply risk. Since new retail space will come to market in small doses as part of mixed-use projects and property renovations, prospective tenants are likely to have limited options in the most sought-after locations. Tenant demand remains warm, but no longer red-hot. After nearly three years in which the number of retail store openings outpaced closures,1 2024 is on pace to see a reversal in that trend with about 500 net retail store closures expected this year. By the end of the third quarter, major retailer bankruptcies had already surpassed the total for all of 2023, highlighting the growing financial pressures in the corporate retail world. This could lead to more cautious real estate footprint plans and increased opportunities for expanding brands to backfill space.
For the data behind the commentary, download the full Q3 2024 U.S. Retail Report.
1 Coresight Research
