Retail Sector Hits 11th Straight Quarter of Sub-5% Vacancy

Retail real estate has maintained vacancy rates below 5% for 11 straight quarters, fueled by strong consumer spending, per Marcus & Millichap’s Q4 report.

Jordan B.
October 16, 2024

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Good morning. Retail real estate continues to outperform, maintaining vacancy rates below 5% for 11 consecutive quarters, driven by strong consumer spending. Plus, group travel is surging, offering a lifeline to hotels and hospitality.

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No Vacancy

Retail Sector Hits 11th Straight Quarter of Sub-5% Vacancy

Retail real estate has maintained vacancy rates below 5% for 11 straight quarters, fueled by strong consumer spending, per Marcus & Millichap’s Q4 report.

Tight market: Across 42 major markets, vacancy dipped to 4.3% by mid-2024, with 32 million square feet absorbed and rents rising in 37 metros. Midwest and Southern markets saw significant declines in both single- and multi-tenant vacancies. In contrast, California's vacancy rate climbed to 5.9%, with weaker rent growth and only the Inland Empire maintaining a vacancy rate below pre-pandemic levels.

Sources: Marcus & Millichap Research Services; CoStar Group, Inc.

Limited new construction: The national construction pipeline remains lean, comprising just 0.4% of existing inventory, with the majority of that space already pre-leased. This scarcity is expected to push retailers toward leasing existing properties rather than waiting for new developments, tightening market conditions further.

M&A activity: Several major mergers are poised to reshape the retail landscape. The Kroger-Albertsons merger faces regulatory hurdles, with hearings in Washington, Colorado, and the FTC. Meanwhile, the FTC is set to review Tempur Sealy’s acquisition of Mattress Firm, which could create a nearly 3,000-store global giant. Saks’ acquisition of Neiman Marcus has cleared regulatory reviews and is moving forward.

Investor demand: Private investors remain highly active in retail, particularly in the $1 million to $10 million price range, which accounted for over 40% of transactions in the past year. Net-leased properties and smaller shopping centers tied to 1031 exchanges are attracting interest. Despite financing hurdles, Q2 deal activity rose 10%, and with lower borrowing costs expected, competition for these properties is likely to intensify.

*Trailing 12 months through 2Q. Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Placer ai; Real Capital Analytics

➥ THE TAKEAWAY

Looking ahead: With the Fed’s recent rate cut and expectations for more, borrowing costs will likely decrease, reopening the yield spread and sparking renewed retail investment activity. Higher leverage from lenders and strong buyer interest, driven by low vacancy rates, position retail as an attractive asset class, especially for investors with capital ready to deploy.

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✍️ Editor’s Picks

Pharmacy shake-up: Walgreens (WBA) to close 1.2K stores in response to declining profits, quadrupling initial closure plans, impacting pharmacy sector.
Rate-driven strategies: Homebuilders are using mortgage rate buydowns to boost sales during a period of high interest rates, but may need newer strategies as rates finally start to fall.
Debt warning: The IMF warned of rising global debt, driven by spending pressures and political tax divides, as major economies like the US face fiscal challenges ahead of the presidential election.
Fraud allegations: Investors accuse CA Ventures executives Tom Scott and John Diedrich of misusing nearly $14M to cover personal debts rather than fund promised developments, leading to lawsuits.

🏘️ MULTIFAMILY

Major foreclosure: TPG Angelo Gordon surrendered its 2 West Delaware Place luxury apartment building in a $130M deed-in-lieu, marking one of Chicago’s largest multifamily foreclosures.
Melbourne expansion: Madison Capital secured $49M in financing to develop Madison Midtown, a 240-unit multifamily community in Melbourne, FL, thanks to the region's space and defense industries.
Senior housing sale: HarborChase of Wilmington, a 96-unit luxury assisted living and memory care community in Delaware, sold for $45M. Harbor Retirement Associates will keep managing the property.

🏭 Industrial

Everything’s bigger: MDH Partners acquired Cedar Port IKEA, a 996,482 SF industrial center in Baytown, TX, near Houston, fully leased to IKEA.
Big bucks in Miami: The $147M sale of the 23.1-acre Miami Midway Park by Butters Construction & Greystar is the largest industrial purchase in south Florida this year at $291 PSF.
Quantum boom: Underused real estate nationwide is spurring the continued development of quantum computing hubs, creating a potential $2T industry.

🏬 RETAIL

CLO crunch: Distress rates for CRE CLOs have hit a record high at 13.1% in Q3, driven by rising interest rates and persistent loan-related challenges.
Urban oasis: Barings refinanced Smoky Hollow in Raleigh with a $134M loan for Class A apartments, office building, and retail space.

🏢 OFFICE

Land and expand: Blue Owl Capital is expanding its Seagram Building lease by 42%, taking nearly 240 KSF in the iconic Midtown tower.
Office evolution: Over the last 4 years, 6.5 MSF vanished from Manhattan offices, mostly for residential conversions, boosting Midtown and Downtown activity.
The Heavenly deal: The Vanbarton Group is set to buy the Catholic Diocese HQ in Manhattan for $100M to convert into offices, following previous office-to-residential conversions.

🏨 HOSPITALITY

Retreats are back: Corporate group travel has grown 6.8% in 2024, surpassing inflation and outpacing smaller group and individual bookings.
Stadium staycation: KPC Development is building a $300M, 12-story, 300-room Kali Hotel next to SoFi Stadium in Inglewood, CA, expected to open by 2026.