What to Watch in 2024: Sun Belt Markets Poised To Lead Nation in Retail Rent

Article originally posted on CoStar on January 9, 2024

Outperforming retail markets clustered in the Sun Belt region of the U.S., which has benefited from years of in-migration and relatively strong income growth, may continue to be the main driver of retail rent in the year ahead.

Per the U.S. Census Bureau, the top eight states seeing the largest population gains from July 2022 to July 2023 were in the Sun Belt, led by Texas, Florida, North Carolina, Georgia and South Carolina. These gains build on the strong population growth seen in prior years and could support relative consumption outperformance in the year ahead.

Under normal conditions, pricing power is a function of the balance between supply and demand, subject to the constraint of affordability. This pricing relationship also holds true when considering the rent potential of retail space.

Demand for retail space is generally highest in well-trafficked corridors with strong demographics. The price retailers are willing to pay to locate in these corridors is dependent on both the balance of availability of space, as well as the sales potential of the location. Simply put, tenants are willing and able to pay more to be in locations where sales are rising the fastest and competition for space is fierce.

With that relationship in mind, it stands to reason that the greatest pricing power for space would be found in markets with both tight availability and strong consumption growth. This was certainly the case over the past five years, as the retail markets that generated the strongest rent growth since 2019 were those that saw the greatest increase in population.

Demand for locations in these pockets of rapidly growing buying power has pushed retail space demand to record levels across most Sun Belt markets. At the same time, retail construction has not kept pace with the growth in population in the region, resulting in a substantial tightening in availability.

There is, on average, 13% less retail space available across major Sun Belt markets than the national average, after accounting for the size of the market. While the national availability rate for retail space is at a historic low of 4.6%, major Sun Belt markets are reporting average availability of just 4%.

The lowest availability rates among major Sun Belt markets are in Charlotte, Nashville, Atlanta and Tampa, with each of these markets reporting 3.5% or less of retail inventory available for lease as of December 2023. However, every major Sun Belt market is reporting substantially tighter market conditions today than at any time over the past decade, with the availability rate for the 11 largest markets averaging 6.1% over that time.

Given the significant rise in population and consumption seen across most Sun Belt markets over the past decade, it is not surprising that increased demand for retail space has overwhelmed new supply. The resulting historically low levels of space availability, if coupled with continued positive migration trends, should underpin an outlook calling for Sun Belt markets to lead the nation in retail rent performance in the year ahead.