U.S. Macro Outlook: Mild Recession ≠ Pleasant




and 7.5% by year-end 2024. The supply wave is destined to temper in 2025 as higher financing and construction costs, as well as higher vacancy, lead developers to let the pipeline lean out. This dynamic and a pickup in demand units and will flip the supply-demand imbalance, allowing the vacancy rate to trend down toward its long-run average in the second half of this decade. Effective rent growth, which was a staggering 17.4% in 2021 and 8.9% in 2022, will moderate in 2024 before reareaccelerating. Loss to lease should help bolster net operating incomes (NOIs) over the next two years, as below-market rents are brought closer to market, even as growth slows. Not Bulletproof, but This Time Is Different Consumers led the way for the U.S. economic recovery in 2021 and remained a relative bright spot last year despite high inflation, pessimistic consumer sentiment and weakening income growth. These challenges will persist this year as the economy enters a mild recession, but resilience thus far is an encouraging sign that consumer demand may hold up better than other segments of the economy. As of January 2023, core retail sales (excluding gasoline and automobile sales) rose 7.4% from a year earlier. Even after accounting for inflation—the consumer price index (CPI) in January was up 6.4% from a year earlier—real retail spending growth has remained modestly positive. In some ways, headwinds to consumer spending (namely, inflation) are expected to improve. Consumer price inflation has steadily retreated from its mid-2022 peak and is destined to moderate further this year, bringing some relief to purchasing power. But households are now bracing for a more formidable challenge in the weakening job market, as the U.S. economy is forecast to shed a net 2.5 million jobs over the course of the year. While inflation is a challenge that consumers can manage by adjusting spending habits such as trading down to value goods—job loss is not. The labor market will be the main factor to watch in 2023. The gloomy outlook reflected in corporate earnings and weaker economic data have not yet decreased retail tenant demand in a meaningful way. In 2022, even while uncertainty was growing, the number of retail store openings surpassed closures by more than 2,400 locations. This marked the first net expansion since 2016, when there was a net increase of 1,100 stores. More importantly, early store count estimates for 2023 suggest further expansion. The recent optimism reflects retailers’ renewed commitment to the long-run profitability of physical storefronts, shifting growth into suburban and

2,000 4,000 6,000 8,000

Total Closure Total Opening Total Net

-12,000 -10,000 -8,000 -6,000 -4,000 -2,000 0














Source: Coresight Research, Cushman & Wakefield Research

secondary markets, and the increasingly symbiotic partnership of physical and digital retail. E-commerce will continue to grow, but online sales are no longer the disruptor that shuttered so many storefronts and spawned “retail apocalypse” headlines in the last two decades. Retailers that survived the pandemic have mostly emerged in an even stronger financial position, so the 2023 recession will be nowhere near as destructive as the Great Recession, where the economic woes were compounded with structural imbalances in the retail real estate industry. The state of the U.S. retail market is in concordance with this resurgent demand. In 2022, net absorption in shopping centers totaled 40.9 msf, which was the strongest annual total since 2017 and above the 2015-2019 average. Meanwhile, the vacancy rate drifted down to 5.7%, its lowest level since prior to the Great Recession, as the recent wave of store openings increased occupancy amid a sluggish supply response. Supply-side dynamics are critical, as retail is a distinct outlier compared with other types of commercial property. Whereas the office, industrial and multifamily sectors have undergone building booms in the last few years, retail inventory growth has been muted with less than 40 msf of total new space delivered from 2020-2022, or 0.2% of inventory per annum, compared with the prior decade’s average of 0.6% annually. New construction is down by about two-thirds, and inventory has been further restricted by demolitions, which totaled more than 90 msf from 2020-2022 and included all retail, not just shopping centers. The current demand and supply imbalance will resolve as developers become more interested in retail’s promise and the recession tempers tenant demand, but a large shift in vacancy is unlikely in the medium term. Our baseline forecast projects that the national vacancy rate for shopping centers will level out in 2023, ending the year roughly where it began at 5.6%, before ticking up to 6.1% by the end of 2024


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