Retail topline fundamentals are solid despite inflation pressures

Leasing fundamentals remain stable in the second quarter

US net absorption for the second quarter remained positive for the sixth straight quarter but dipped 12.2% to 18.9 million square feet. Over the last 12 months, net absorption hit another five-year high of 94.3 million square feet. Deliveries remained low at 4.1 million square feet well below even what we saw in 2020. Development continues to skew towards single-tenant build-to-suits or ground floor retail spaces in mixed-use developments. With construction constrained, vacancy fell 10 basis points to 4.4%, with almost all shopping center types showing compression over the quarter. Vacancy fell from year-ago levels across practically all major markets, including San Francisco and New York. However, the year-over-year declines remain strongest in Sun Belt markets like Phoenix, Dallas and Tampa. We’re seeing a similar pattern with rent growth. National retail rents rose 4.3% from Q2 2021, and almost all major metros are seeing gains, with the exception of San Francisco, where rents fell 3.7% year-over-year. Rent growth is strongest in markets with high vacancy compression: Las Vegas rents rose 9.4% year-over-year, Tampa rents rose 7.4% and Miami’s rents, 9.3%.

Gateway markets like San Francisco and New York start to see vacancy compress

Consumers pull back on goods spending thanks to inflation

Inflation has been a rising issue of concern over the last few months. The CPI surged 8.6% in the last year – the highest level in 40 years. Gas prices, in particular, have surged, rising nearly 50% year-over-year.  As a result, consumers pulled back on spending in May; retail sales dipped 0.3% from the previous month, with declines across most categories except for restaurants & bars, groceries, and a few other categories. Real spending on durable goods dropped 3.5% month-over-month in May, while spending on services continued to grow moderately at 0.3%. As inflation surges, consumers have dipped into savings to bankroll purchases. The personal saving rate now stands at 5.4% - a significant drop from its high of 34% in April 2020 and half of its year-ago level of 10.4%.

Inflation by product category

Consumers leaned into experiential visits in June

Underscoring the move away from goods spending to services, consumers flocked to movie theaters, fitness and eatertainment-type attractions in June. Movie theater visits were up 23.8% - largely due to two major blockbusters – Top Gun: Maverick and Jurassic World Dominion – both of which grossed more than $300 million in June. Despite wildly varying critic scores on Rotten Tomatoes (97% vs 30%), Americans really just wanted to sit back and be entertained by larger-than-life action scenes while scarfing down over-priced popcorn and sodas. A return to normalcy, if you will. Similarly, as the summer heats up, consumers are heading back to the gym, likely to prep for outings to the beach, pool and lake. Visits to restaurants fell 6.4%, however, which may point towards a cutback in F&B spending for the month.

Consumers focus on experiential destinations in June