In this episode of The Inside Look, Senior Commercial Real Estate Economist Xander Snyder explores the shifting trends in CRE Retail. 

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Transcript:

The state of retail

Retail CRE finds itself in an interesting position right now. Despite a slate of store closures scheduled for this year, there is very little retail space available to lease. Though net closures are expected to be higher in 2025 than in 2024, there is still demand waiting on the side lines to re-lease at least some of that that newly vacated space.

At the same time, consumers are facing a number of headwinds, and consumer sentiment has dropped precipitously. Slowing retail sales growth could certainly impact retailers’ sales and therefore the demand for retail space, but the limited availability of retail space will mitigate that impact on the retail leasing market.

Real Retail Sales Surge is Likely Temporary

Though real, inflation-adjusted wages have been growing since the latter half of 2022, consumers are increasingly using debt to fund their purchases. Some of this debt has been used to purchase durable goods, like cars or home appliances, which led to an increase in real retail sales over the last six months, despite stagnating for the two and a half years prior.

This rise in spending has come with a cost. Delinquency rates on both auto loans and credit cards continue to grow, with credit card delinquency rates reaching levels not seen since late 2011. This will eventually constrain consumers’ ability to spend at prevailing levels, especially for larger purchases like cars. This tradeoff between spending now at the expense of tomorrow suggests that consumers may be pulling demand for larger purchases forward from the future to get ahead of price uncertainty. This burden of consumer debt, coupled with rising delinquencies, signals a likely future cooling of retail spending, especially in durable goods, which are often purchased using financing.

Additionally, retail spending patterns are undergoing significant changes, indicating shifts in foot traffic and demand at various retail locations. After the pandemic, there was significant growth in real retail sales at restaurants. However, this trend reversed in 2024. Real sales growth for food at home turned positive while real retail sales at restaurants and bars stagnated. Consumers are now eating out less and dining at home more, which is likely to increase foot traffic at grocery stores and shopping centers anchored by grocery stores, while restaurants may experience a decline in demand.

Conclusion

Surging durable retail sales have driven headline real retail sales into positive growth territory, but this may be masking underlying weaknesses. The rise in durable retail sales alongside increasing consumer debt suggests that the spending spree may have been pulled forward due to consumer uncertainty about price trends.

If you’re interested in learning more about trends in real retail sales, check out this interactive visualization that the First American econ team made. It lets you scroll through different categories of retail sales and see they are trending on a real, inflation-adjusted basis.