Demand for retail space surged to pre-pandemic levels, with the majority of the U.S. population vaccinated and returning to physical stores and food and drinking places, as retail sales and total consumption exceed pre-pandemic peak levels.
Retail leasing activity returned to pre-pandemic levels in Q2 2021. Since that point, as of October 13, retail leasing activity has softened a bit as activity totaled 48 million square feet, down from 54 million square feet in Q2 2021, but still above levels observed the same period a year ago. In addition, leasing activity through the first three quarters of 2021 of 151 million square feet outpaced that across the same period last year (137 million square feet). Neighborhood centers led all property types in leasing activity square footage with 18 million square feet. Four markets in particular, Dallas-Fort Worth, TX (5 million square feet); New York, NY (4.7 million square feet); Houston, TX (4.4 million square feet); Los Angeles, CA (4.2 million square feet); and Atlanta, GA (3.9 million square feet), led the nation in retail leasing activity as of October 13, according to CoStar data. Interestingly, the majority of neighborhood center leasing activity square footage is in the Southern states and especially Texas. Dallas-Fort Worth, TX and Houston, TX were the leaders in neighborhood center leasing activity with 982,913 sq. ft. and 971,405 sq. ft. respectively.
During the past three months ending October 13, there was a net absorption gain of 32,158,212 square feet, the highest level since Q4 2017. While absorption was positive across all of retail, absorption was positive for each retail category as well for the first time since Q4 2019. Gains in net absorption were driven by strong demand for general retail and neighborhood centers at 15.9 million square feet and 11 million square feet respectively.
According to CoStar® market data, primary markets such as Dallas-Fort Worth, TX (4.3 million square feet) and Atlanta, GA (2.8 million square feet) had the most positive retail space net absorption. On the opposite end of the spectrum, markets which led in negative retail net absorption were Weirton-Steubenville, WV (-431,634); Tulsa, OK (-308,436); Springfield, MO (-306,676); Greeley, CO (-303,840); and New Orleans, LA (-283,202).
With respect to the retail property types, Southern states led with the most positive net absorption of each property type, that is, general retail, malls, neighborhood centers, power centers and strip centers. Texas markets (Dallas-Fort Worth and Houston) led the nation in positive net absorption for general retail, power centers and strip centers at 1 million square feet, 328,054 square feet and 299,208 square feet respectively.
At the national level, the retail vacancy rate fell 20 basis points to 4.8% in Q3 2021, the lowest it has been since Q2 2020, as all retail property types exhibited compression. With respect to the retail property categories, neighborhood centers saw the highest vacancy rate at 7.4% while malls, strip centers, power centers, and general retail were 7.2%, 5.5%, 5.6%, and 2.9% respectively. Strip centers saw the most improvement as rates decreased 0.5% from Q2 2021 and decreased 0.9% from the same period a year ago.
The markets with the highest retail vacancy rates were Decatur, IL (12.4%); Chambersburg-Waynesboro, PA (11%); Kankakee, IL (11%); Carson City, NV (9.3%); and Johnstown, PA (9.1%), while the markets with the lowest vacancy rates were Billings, MT (1.2%); Coeur d’Alene, ID (1.3%); Duluth, MN (1.3%); and Cedar Rapids, IA (1.3%).
New supply totaled 3.2 million square feet in Q3 2021 and is significantly down from 8.3 million square feet in Q1 2021 and 8.9 million square feet Q2 2021. The new retail supply low of Q3 2021 is even lower than that of Q2 2020, which was 5 million square feet. The majority of the retail space under construction remains centered around general retail.
Retail rent growth is up 1.9% from a year ago where strip centers have seen the most growth at 2.6%, but differences exist in rent shifts by retail property type and location. Coastal and urban metros such as Boston, MA; Baltimore, MD; and East Bay, CA, have seen negative rent shifts for all of retail over the past 12 months. Conversely, Southern and Midwestern markets like Jacksonville, Atlanta, and Akron are showing the strongest year-over-year rent gains.