Retail occupancy levels at five-year high — so are costs

Rents and occupancy costs are rising, increasing challenges for retailers, restaurants and other businesses.

Retail occupancy levels hit a five-year high in 2023 at 88.4%, according to Datex Property Solutions’ recent 2024 Market Outlook report. When spaces do become vacant, the time to re-lease that space is shrinking, with the average number of days to fill a vacancy last year coming in at 95 days, a decrease of 18% from 2022, and a 24% decrease compared to 2021.

Both new lease and rent renewals are increasing, but at different rates. In 2023, 61.5% of new leases increased compared to the previous tenant, a jump from 55.5% in 2022. While 30.3% of new leases decreased, and 8.1% stayed flat, the yearly rent change for 2023 was a 6% increase.

When it came to renewals, 83.2% of leases increased in price in 2023, a rise from 77.2% in 2022. Only 4.7% decreased and 12% stayed flat. The average rent change for renewals was an 8.8% increase.

In addition to increasing rents, occupancy costs were at a five-year high in 2023 at 7.43%, rising from 6% in 2022. Datex noted in the report that this could be a greater factor in tenant failures than increased rents.

“The one possible fly in the ointment in terms of the overall health of the retail market is that growth in rental rates outpaces growth in retail sales, leaving retailers fewer dollars to actually operate their businesses,” said Mark Sigal, CEO of Datex.

In 2023, the merchant categories that had the highest sales per square foot also had the lowest occupancy cost percentages. The sectors include beauty supplies (4.7%), fast food (6.2%), restaurants (6.4%), supermarkets (2.1%) specialty food retailers (9.7%), and sporting goods (1.6%).

Sectors with the lowest sales per square foot and high occupancy cost percentages
included crafts (12.7%), office supplies (17.3%), movie theaters (20.4%), and fitness
centers (20%).

“Given their relationship to merchant health, the overall rise in occupancy costs could be an early sign that portfolio owners may see an increase in tenant failures in 2024, which would change the calculus for unfettered growth,” said Datex in the report. “The way to think about rising occupancy costs is the bigger the slice of the sales pie that is eaten up by rent, the less slices are available to hire people and to actually market your products and services.”