Retail Shows Resilience Despite High-Profile Bankruptcies

Good morning,

Retail shows resilience despite high-profile bankruptcies, multifamily construction slows as market cools, and borrowers seek alternative debt options as lenders tighten standards. Let’s delve into today’s topics.

📈 Market Update

🛍️ Retail Shows Resilience Despite High-Profile Bankruptcies

The US retail market has demonstrated remarkable resilience so far in 2023, even as several well-known chains have declared bankruptcy. Store openings have outpaced closing by nearly 1,000 so far this year. Discount and dollar stores are leading the way along with off-price chains, capitalizing on bargain-hungry consumers and seizing vacant space shed by bankrupt retailers like Bed Bath & Beyond. The overall retail vacancy remains low at 4.2%, indicating strong demand.

Consumer spending remains robust:
Retail sales grew 3.2% in H1 2023 compared to last year, albeit is down from stimulus fueled 2021 and 2022 spending. Shoppers are hunting for bargains amid high inflation, and discount stores are benefitting as consumers trade down. Retail foot traffic turned positive in June, providing optimism for the second half of 2023.

Strong demand for open-air centers, but malls face bifurcation:
Demand for space is surging at open-air shopping centers, where availability rates have dropped to record lows. Construction starts have also declined dramatically as costs rise. Class A malls in good locations continue to thrive, but as reported earlier this week lower-tier malls face declining demand and oversupply. Retailers are targeting open-air centers for expansion as mall demand bifurcates between the haves and the have-nots.

The takeaway:
The retail industry still faces economic uncertainty but has proven remarkably resilient thus far in 2023. Store openings are outpacing closings, consumers are still spending, and retails are aggressively expanding into open-air shopping centers. Overall, the industry appears poised to finish the year on solid footing.

🏘️ Multifamily Construction Slows as Market Cools

Rates for multifamily permitting and starts saw significant declines in June compared to prior years. Multifamily permitting fell 13.5% MoM and 33.1% YoY to 467,000 units. Single-family starts were also down, declining 7% MoM and 7.4% YoY in June to 935,000 units.

Construction completions still climbing:
Multifamily completions rose 26.3% annually to 476,000 units in June. While starts and permits are decreasing, completions continue rising as projects in the pipeline finish construction.

🏦 Borrows Seek Alternatives Debt Options as Lenders Tighten Standards

Traditional CRE lending has tightened considerably as the pool of lenders shrinks. Higher rates have suppressed investment activity, and regional banks and institutional lenders are being particularly cautious. This has led borrows to private funds, preferred equity sources, and alternative lenders, even at higher rates compared to institutions.

Borrowers get creative:
Seller financing is becoming increasingly popular and viable. Some borrowers are using short-term bridge debt, betting on interest rates coming back down in the next few years.

✍️ Further Reading

• Single-Family Home Construction has Bottomed in Current Macro Environment (CNBC)

• Buying a Home From a Builder? Here’s What to Know First (WSJ)

• How the US Economy is Sticking the Soft Landing (WSJ)

• Fitch Downgrade Won’t Break Washington’s Tax, Spending Habits (WSJ)

• Rent-Stabilized Owners Suffer Swell of Foreclosures (RD)

• Concession Rates Rising in Some Major Metros (GS)

• Coworking Spaces See 10% QoQ Growth (GS)

• Goldman Sachs Restructures Senior Team at $50B Real Estate Business (CS)

• Houston, We Have Several Problems (CO)

📊 Chart of The Day