Retailers Snap Up Available Space as Demand Outpaces Supply

Good morning,

Retailers snap up available space as demand outpaces supply, Class A office vacancy rises 700 bps since 2019, and investment firms head south, fleeing high costs in NYC and CA. Let’s delve into today’s topics.

📈 Market Update

🛍️ Retailers Snap Up Available Space as Demand Outpaces Supply

Retailers are poised to open 1,000 net new stores in the US this year, and demand has remained strong despite economic headwinds like high inflation and interest rates. The shift stems from a sharp decline in retail construction after the 2008-2009 recession, allowing the previously overbuilt sector to absorb excess space. Predictions that e-commerce would make physical stores obsolete also failed to materialize, as digital brands now open brick-and-mortar stores after hitting online limits.

Suburban shopping centers in particular have benefited as remote work leads consumers to shop locally more often. Many restaurants and retailers have moved from cities to suburbs in response. With little new supply amid higher demand, landlords have gained pricing power. While some malls are struggling, especially older enclosed properties in areas with declining populations, higher-end malls report rebounds in leasing and foot traffic. Overall, dollar stores lead in new leases this year, but retailers across sectors are adding locations.

🏢 Class A Office Vacancy Rises

The office market has seen dramatic changes since the pandemic began, with the national office vacancy rate hitting a record 13.2% in mid-2023, up 370 basis points since 2019. However, the impact has varied greatly based on location and building class. Vacancy has risen most sharply, by 700 basis points, in Class A office buildings in major U.S. markets - now up to 19% vacant. This divergence stems partly from newly completed but under-leased space in big cities, as well as an exodus of tenants from unused space. Demand shifts have hit major tech hubs like San Francisco especially hard, while a few markets like Miami have fared relatively better. But the overarching trend is clear - the prime office buildings in big cities have borne the brunt of the remote work revolution.

🌞 Investment Firms Head South, Fleeing High Costs in NYC and CA

New data shows the extent of the finance industry's exodus from New York and California. Firms managing close to $1T in assets have left each state since 2020, costing thousands of high-paying jobs and tax revenue. While New York remains the top asset management hub, the Sun Belt is booming. Miami and Dallas are gaining new office buildings and campuses for arriving firms like Goldman Sachs and Charles Schwab. Lower taxes and costs of living are main draws, along with warmer weather. The Sun Belt's economy is transforming as finance joins tech, energy and tourism.

Sunbelt Booming:
Florida gained the most firms from New York, while Texas lured the most from California. Low-tax Tennessee and North Carolina each added over $600 billion in assets. Texas gained 1,200+ investment professionals from newcomers; Florida added 470.

Though most states saw asset gains from market performance, New York and California bled talent. For many who left crowded, costly coastal cities, the moves have meant more space and new lifestyles. But some also pine for big-city amenities. While leading, legacy hubs endure, the South's appeal accelerates finance's footprint drift.

✍️ Further Reading

• Feisty Little Black Spruce Trees Prove Unlikely Heroes in Fast-Growing Mass Timber Building Trend (CS)

• Google Looks To Offload Another Big Office Campus in Silicon Valley (CS)

• Zara Billionaire Drops $232M on West Loop Apartment Tower (RD)

• Banks Don’t Love Rich Mortgage Borrowers as Much as They Used To (WSJ)

• Treasury Yields Hit Highest Since 2007 on Elevated Rate Fears (BBG)

• These Are the Sunbelt Markets Where Multifamily Owners Face the Most Financial Risk (CPE)

• Mortgage Rates Hit Their Highest Point Since 2000 (CNBC)

• Market Pulse: More Bank Downgrades?; China Concerns Weigh on Markets (Trepp)

📊 Chart of The Day