Why Retail Is Preparing for a Reset

Guest Contributor

June 6, 2024

The inside of a colorful Nike store, with bright clothes on the mannequins

The U.S. retail sector is at a unique crossroads. On the one hand, red-hot consumer spending has carried retail into one of its liveliest eras in recent memory. Retail leasing activity remains strong due to steady demand and tightening supply. Plus, national cap rates and average asking rents are up compared to the end of last year.

On the other hand, investment activity has slowed significantly due to unyielding interest rates and a widened bid-ask spread between buyers and sellers. And while still nowhere near 2022 levels, moderate upticks in inflation have somewhat dampened the market's optimism about H2 rate cuts.

However, signs of a reset are already emerging. It’s true—consumers have certainly been more liberal in their spending over the past year. Cushioned by excess savings from the pandemic, Americans increased their monthly spending continuously during the first three months of 2024. And yet, the Federal Reserve Bank of San Francisco estimated that American households fully spent their pandemic-era savings as of March 2024.

Does that mean consumers will stop spending so much? It remains to be seen. American Economist Herb Stein said, "If something cannot go on forever, it will stop." At the same time, retail’s historically sound fundamentals suggest that even a downturn in consumer savings—and therefore spending—won’t discourage investors.

National Retail Trends

Recent data provided by Crexi portrays a promising, more stable path for retail. Notably, retail sales assets ranked number one in search popularity in Q1 2024, while buy actions were up 20.53% from Q4 2023. Crexi’s retail tenant activity, which includes views and other lease-related actions taken on a property’s listing, was also up 13.99% quarter-over-quarter. Select metropolitan areas reported heightened retail numbers in the first quarter of 2024:

Los Angeles reported the highest average retail price at $521.43 per square foot.
Las Vegas reported the highest average asking retail rent at $16.54 per square foot.
Houston reported the highest cap rate for retail assets at 7.05%.
Similarly, Crexi identified the most-searched areas with retail properties for sale or lease:
Houston, Chicago, and Dallas were the most-searched cities for retail properties for sale.
Chicago, Houston, and New York City were the most-searched cities for retail lease listings.
Overall searches were up 36.33% QoQ for retail properties for sale and down 6.39% QoQ for retail lease listings.

While national retail offers were down 21.77% quarter-over-quarter in March 2024, year-over-year offers reported no change (0%).

chart of national average asking price per sf of different asset classes based on Crexi Intelligence data in Q1 2024 and previous quarters

chart of national retail statistics based on Crexi Intelligence data in Q1 2024 and previous quarters

Consumers Still Hold the Keys

It’s only a matter of time before consumers stop spending as much as they have been. In March 2024, inflation-adjusted spending rose by 3.1% from the year before. At the same time, real income growth was slower than spending growth in February and March 2024, suggesting that consumers may rely more heavily on borrowing.

Another slowdown worth noting is the U.S. labor market, which added only 175,000 jobs in April 2024 compared to the first quarter monthly average of 269,000. Add in moderately stubborn inflation and interest rates, and retail appears to face a challenging yet opportunistic year ahead. However, limited new retail construction and historically low availability rates should help limit any unexpected jump in vacancy rates caused by demand pulling back.

A Balancing Act

What does a reset for retail mean? Consumer spending is on track to normalize after months of excess. However, if other factors persist, such as near-record-low unemployment and strong wage gains, Americans may not need to cut spending as much. Once inflation reaches levels deemed necessary by the Federal Reserve to cut back rates, retail development and investment activity will gain momentum again. Whether that happens this year is unclear, but until then, impressive demand from retail tenants will only strengthen the sector’s resilience.

Another perspective reveals a delicate balancing act in the retail sector, with multiple seemingly inverse forces at play: unprecedented consumer spending, unyielding fundamentals, and underperforming investment activity. As the lingering effects from COVID—and perhaps even the GFC—gradually dissipate, the intensity of these forces will also diminish, bringing retail closer to a middle ground. Here, investor interest remains robust, supply aligns with an ever-resilient demand, and cap rates continue on an upward trajectory, providing a reassuring picture for industry professionals.

About the Author:

Scotty Latimer is an Associate at Matthews Real Estate Investment Services™ who specializes in single-tenant net lease investment sales. Scotty has transacted over 217K square feet valued over $36M and has earned recognition as a 2024 Crexi Platinum Broker and Power Broker by D CEO. He is based in Dallas, Texas.

Disclaimer: This article's information is based on Crexi's internal marketplace data and additional external sources. While asking price in many ways reflects market conditions, variations in pricing are affected by changes in inventory, asset size, etc. Nothing contained on this website is intended to be construed as investing advice. Any reference to an investment's past or potential performance should not be construed as a recommendation or guarantee towards a specific outcome.

Get more data-driven insights with Crexi Intelligence.

Share This Article

Stay Connected

Follow Along on Social for More