Q1 2024 Market Outlook
by Matt Toczylowski
The retail real estate sector posted another strong quarter to begin 2024, continuing to exhibit impressive fundamentals that have further solidified its position as a leader within the broader commercial real estate market. For more than three consecutive years, Neighborhood Shopping Centers have benefited from unprecedented demand for retail space along with shortages in the supply of new construction, which have combined to create significant opportunities for owners and operators of retail real estate. These favorable market dynamics, which have driven occupancy to record highs and resulted in robust rental rate growth, are expected to persist well into 2024 as demand for new space shows no signs of letting up amid a prolonged forecast of limited availability.
Although borrowing costs remained stubbornly high and inflationary concerns persisted during the first quarter, these economic challenges have yet to dampen consumer demand for convenient shopping options and necessity-based goods and services. Consumer spending at neighborhood retail centers rose yet again during the first quarter, with sales at restaurants, bars, and electronics, appliance, and apparel retailers outpacing inflation. Additionally, sales at miscellaneous retailers – which includes a broad segment of businesses – grew by 3.2%, before adjusting for inflation. While contrary to typical inflationary conditions, these positive consumer spending trends have helped to advance the performance of neighborhood retail centers, attracting more and more tenants to these locations.
For each of the last three years, an average of 10,000 new leases have been signed for small shop space (1,000 SF – 5,000 SF) at Neighborhood Shopping Centers, reflecting steadfast tenant demand for these storefronts. Despite a slight decrease in new leasing during the first quarter across the industry (which is attributable to ongoing supply limitations rather than slowing demand), retail occupancy remained at historic highs for the period and consistent with the tight retail market conditions reported at the end of 2023. With new development expected to remain at record lows for the foreseeable future, small shop leasing activity is projected to maintain a positive trajectory well into the future.
The Fed’s decision to maintain their position on interest rates – and further signaling that no rate changes are expected in the near term – introduced stability to the transactions market during the first quarter. Sellers that were waiting to capitalize on potential rate cuts in early 2024 began to rethink their disposition strategy, with many electing to test the market sooner rather than later. While pricing remains challenging to navigate, there was an uptick in listings at realistic pricing toward the end of the first quarter which should increase transaction volume across the industry should this trend hold.
As the second quarter of 2024 begins, the retail market continues to be a source of significant opportunity. Baceline Group’s confidence in retail investment strategies remains strong, and the value of aggregation in Neighborhood Shopping Centers has never been higher. With the markets now placing significant value on this property type, 2024 will allow owners to secure longer-term stability for their investment properties and stakeholders alike.
