Looking for Retail Rent Growth? Follow the People.

Sun Belt Markets With Stronger Population Growth Post Larger Retail Rent GainsSun Belt Markets With Stronger Population Growth Post Larger Retail Rent Gains

CoStar Analytics

The strength of the U.S. retail real estate recovery has surprised some market watchers over the past three years, as growing demand from a wide range of tenants has pushed store space availability to its lowest on record. Experiential, discount, off-price, medical and food and beverage tenants have driven strong demand gains as consumers pushed sales to record highs.

Declining available store space and surging retail sales have given retail landlords their greatest pricing power in well over a decade, resulting in aggregate asking rent growth of over 11% since the end of 2019 and an average of 4% during the past year alone.

While average rent growth differs across box sizes and shopping center types, the recent pace of growth is more than twice that seen during the prior decade. Landlord pricing power for available retail spaces is not distributed evenly across U.S. markets, however, and the adage of retail following rooftops appears just as true today as ever.

Of the 43 markets within the U.S. with at least 100 million square feet of retail space, only 12 have seen their cumulative retail rent growth fail to eclipse the national average of 11%. Unsurprisingly, each of these markets saw little to no population growth since the start of 2020. The worst-performing market, San Francisco, saw retail rents rise by just 1.8% since the start of 2020 in conjunction with a 5.7% decline in population.

Other underperforming markets include large urban markets that lost population during the pandemic, such as New York and Los Angeles, as well as Midwestern and Northeastern markets that are struggling to grow their consumer base, such as Milwaukee, Chicago, Baltimore and Northern New Jersey.

Conversely, nine markets, all of which are in the Sun Belt, have seen average retail asking rents grow by at least twice the national average, or by more than 22%, since the start of 2020.

Of these, all but one have seen their population increase by more than 2.5% over the same time frame. The one outlier is Fort Lauderdale, Florida.

According to Juan Arias, CoStar’s director of market analytics in South Florida, “Fort Lauderdale, as well as South Florida in general has performed well due to a rise in resident buying power, largely driven by higher income households moving into the area. Fort Lauderdale has also enjoyed a boost from domestic tourism during the pandemic as well as remote workers. Inflation-adjusted retail spending in Broward County, and all South Florida remains elevated relative to pre-pandemic levels as the consumer continues to spend despite significant inflation.”

With available retail space in prime corridors limited and construction and financing costs challenging for new development, retail landlords are likely to maintain strong pricing power over the near term as long as consumers continue to spend at current levels. This will be especially true in markets that capture an outsized share of future population growth.