Little noticed amid the teeth-gnashing about office and rush of capital to logistics is the retail sector’s robust performance. The appetite for neighborhood, community and strip center (NC&S) retail space reached a new high in Q2 2022 as absorption totaled 7.5 times delivered space, then fell to 4.9 times delivered space by Q4 2022. The availability rate has fallen to 7%—250 basis points below its long-run average.

So, what is happening in the retail market? Hardly any new retail space has been constructed during the past decade. Meanwhile, brick-and-mortar retail sales have risen as Americans spend more on experiences at places like restaurants, cafes and breweries. Online retailers have opened stores in some prime retail hubs. But there is not much prime space still available, and many retailers have been forced to settle for space in tertiary locations.

We expect a continued fall in the ratio of absorption to new stock. The sheer scarcity of prime space will limit retailer occupancy growth, and should the economy slip into a moderate recession, as expected, consumers will surely cut back on spending. Nevertheless, real estate fundamentals will remain tight in a sector that investors have largely overlooked, creating some opportunities to unlock retail’s value.