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Q2 2023 Market Outlook

September 6, 2023

Q2 2023 Market Outlook

by Matt Toczylowski

For the US retail real estate market, the second quarter represented a repeat of the last several quarters:

• Consumer spending rose yet again;
• Net positive absorption of retail space continued; and
• Retail rental rate growth persisted.

Compared to Q1, Q2 was much less tumultuous regarding national retail bankruptcy announcements, and select retail categories maintained or increased their pace of new store openings. Retail real estate, particularly within Neighborhood Shopping Centers, continues to demonstrate its overall resilience, with the sector’s most prominent challenge being the lack of available space for lease.

Retail leasing momentum in the US maintained its upward trajectory in the second quarter, representing the ninth quarter of positive net absorption across the industry. While still positive, leasing growth has begun to taper; this year’s 18.2M SF of net absorption through June is the lowest figure reported within the retail sector since 2020, the first year of the pandemic. However, this slowdown in positive net absorption is primarily attributable to the lack of available supply due to the sustained occupancy gains in the retail sector over the last three years.

At the end of the second quarter, retail landlords reported the sector’s lowest vacancy rate on record—4.2%. Another contributing factor to historically low vacancy rates is the lack of new retail development. Over the past year, only 51M SF of new space has been delivered, representing a 35% drop compared to the pre-pandemic annual average. Most new space comprises build-to-suits and small freestanding buildings – virtually no multi-tenant, small-shop space is being developed.

As a result of high demand, limited supply, and strong consumer spending, the average rental rate for triple net leases across the US has increased 3.5% at the fastest pace in over ten years.The Federal Reserve continued to raise interest rates in the second quarter to levels not experienced in over 20 years, muting transaction volume in the commercial real estate investment sales markets. Nationwide, multi-tenant retail investment sales are down 58% year-to-date compared to the same period last year.2

The persistent rise in interest rates undoubtedly puts downward pressure on income-generating real estate with floating rate debt. Many economists predict that interest rates will begin to recede in 2024 through 2025, but if rates continue to increase at their current pace throughout the remainder of 2023, retail real estate owner-operators will continue to experience a temporary decrease in cash flow.

Regardless of today’s turbulent financial markets, retail real estate investment managers should prioritize the long-term, financial health of their investments while remaining committed to optimizing the performance of their assets through areas within reasonable control. These include strategic capital efficiency, occupancy growth, higher new lease and renewal rates, and expense management for the foreseeable future.

Despite the possibility of additional headwinds, the retail real estate market exhibits counterbalancing positives that should help navigate a potential economic downcycle with greater ease than in years past. In particular, Neighborhood Shopping Centers contain a much more diverse tenant base than they have historically, including a broad mix of everyday services such as healthcare providers, fitness operators, and childcare centers. Additionally, retailers continue to rely on brick-and-mortar locations to augment online sales, process returns, and engage with customers, increasing the long-term viability and subsequent demand for well-located, Neighborhood Shopping Centers.



1 Lee & Associates – 2023 Q2 North America Market Report

2 Real Capital Analytics – Q2 2023 Data Analysis


Matt is the Vice President of Capital Development for Baceline and has spent 13 years in business development and investor relations. After 2 years of fundraising for Baceline’s retail strategies, he has found a new passion in real estate fund asset management.