Q3 2024 Market Outlook
By Dusty Batsell
The macroeconomic and political uncertainty that has been lingering in the U.S. since the beginning of 2024 came into sharper focus in Q3 and further crystalized in early November. After remaining elevated for more than a year following several consecutive quarters of increases, interest rates began to reverse course in Q3. Furthermore, U.S. elections were held in early November and ushered in a new administration at the Presidential level. While the long-term implications of the new administration and its policy initiatives will take time to evaluate, the initial reaction within the public markets in the wake of the election was overwhelmingly positive: the dollar rallied, stocks closed at record highs, and bond prices fell as expectations of tax cuts and tariffs on imports drove optimism about economic growth alongside worries about potential inflation.
The commercial real estate sector (and the economy as a whole) received long awaited news during the third quarter, as short-term interest rates were reduced by 50 basis points in September which was a more substantial reduction than many experts anticipated. This reduction was in response to the continued resiliency of the U.S. economy, which expanded by 2.8% in Q3 – the ninth consecutive quarter of growth. [1] The continued economic growth is a function of the macroeconomic fundamentals reported during the quarter: employment figures continued at historically high levels, consumer spending remained robust, and estimates of personal income and savings were revised sharply upward, all of which point to a U.S. consumer that is in a better position to face any financial turbulence that may lie ahead. This momentum carried into November, when interest rates were reduced again by another 25 basis points. As the U.S. economy marches steadily along and inflation continues to stabilize, the probability of a no-landing or soft-landing scenario becomes much more realistic.
The notable performance of retail real estate over the last several years has attracted a bevy of institutional investors to the sector, all of which are seeking to increase their investment exposure to what is finally being accepted as an investment-grade asset class. This interest reached a palpable level in Q3 as Curbline Properties Corp., which owns multi-tenant, unanchored shopping centers across the country, began trading on the NYSE at a market capitalization of $2.55 billion. Additionally, Blackstone Real Estate, one of the world’s largest real estate investors, recently announced the acquisition of Retail Opportunities Investments Corp. in an all-cash transaction valued at $4 billion. Both transactions demonstrate the sizeable demand for identifying and investing in experienced operators that have amassed a portfolio of high-quality, well-located retail real estate.
Retail real estate continued to exhibit strong fundamentals in the third quarter of 2024. The national occupancy rate for shopping centers remained at historically high levels (94.5%), and new development has been virtually nonexistent, with 2024 currently on pace to be the worst year on record for new retail construction. This bodes well for retail landlords as potential tenants will continue to have limited options for the foreseeable future, which will result in sustained occupancy and ongoing rental rate growth.
However, not all news was positive for the retail sector. Following three consecutive years during which store openings outpaced store closures, that trend appears to be reversing in 2024: net retail store closures are expected to exceed 500 this year and the number of major retailer bankruptcies announced through the first three quarters of 2024 has already surpassed the prior year’s total. These results are mostly attributable to the bankruptcy filings of large-scale retailers Big Lots, Lumber Liquidators, and Conn’s HomePlus, in addition to the announced store closings of Family Dollar (620), Walgreens (500), and CVS. While the long-term impact of these store closings on retail real estate remains to be seen, it is a sobering reminder of the mounting financial challenges some retailers are facing. Although it could lead to more careful real estate expansion plans, it also introduces opportunities for expanding brands to backfill recently vacated, well-located spaces.
As we enter the final quarter of 2024, the retail sector is well-positioned for a successful holiday season, fueled by strong employment, declining interest rates and resilient consumer spending. As the market increasingly recognizes the value of this property type, Baceline Group is strategically poised to leverage growth opportunities, driving long-term value creation for its stakeholders. With a focus on sustained success, the company is committed to capitalizing on emerging trends and maximizing returns in this high-demand asset class.
[1] Q3 2024 Advance GDP report; U.S. Bureau of Economic Analysis
