$2.15 PSF
Average Asking Rate (NNN)
MARKET HOLDING OWN DESPITE RISING BANKRUPTCY TREND
At the end of Q4 2024, shopping center vacancy in the Sacramento region stood at 7.6%--the same level where it stood both one quarter ago and one year ago. This is also where vacancy stood at the start of 2023. Vacancy has moved little over the past two years in California’s capitol city, but that has not been the result of flat activity.
Gross absorption, the measure of total deal activity, topped 2.1 million square feet (MSF) in 2024. This is on par with what the market recorded in 2023 (2.1 MSF), 2022 (2.2 MSF) and surpasses 2021 (1.8 MSF). But while we saw vacancy falling in 2021 and 2022 with similar levels of deal activity, there is one primary reason why it has remained static the last two years; store closures and bankruptcies have been picking back up.
Sacramento’s shopping center market recorded only 2,000 square feet (SF) of positive net absorption in Q4 2024, bringing total occupancy growth totals for the year to 215,000 SF. A cursory reading of the numbers might lead one to assume that leasing activity has been flat in the region, but this has simply not been the case. Costco, Amazon Fresh, Sprouts, TJX, REI, Safeway are among the dozens of major space users that have opened stores in the Sacramento region in the past year. Meanwhile, fitness clubs, restaurants, beauty concepts (from cosmetics to Medispas), and rising categories like veterinary clinics and car washes have also been actively signing deals. But a spike in store closures from a select few retail chains (mostly concentrated within a few categories) have mitigated what otherwise would have been strong positive net absorption levels for the year. The numbers may appear flat, but the activity has been anything but.
While tenant demand has cooled slightly from the levels experienced during the initial pandemic retail rebound (20212023), it remains strong. We think the strongest indicator of this is ongoing rental rate growth. The average asking rent for retail space in the Sacramento region now stands at $2.15 per square foot (PSF), on a monthly triple net basis. This metric has increased by 4.9% over the past year even though closures and bankruptcies have been ticking up. Yet our brokers still report a shortage of available Class A space, particularly for smaller shop spaces. Anecdotally we know of multiple instances where smaller space tenants have renewed existing Class A spaces at rates of 20% or more than their previous rents. With little new development in the pipeline (and most new construction heavily pre-leased prior to delivery), the balance of power in negotiations locally still favors landlords though it remains to be seen whether these trends will hold heading deeper into 2025. Our brokers are reporting that deals were taking longer to get approval (particularly over the final half of 2024), with retailers starting to approach the market with more caution than they did just 12-24 months ago.
HOW DID WE GET HERE?
While 2020 set all records for retail and restaurant closures, failures and bankruptcies, the market sparked back to life in 2021 thanks to a mix of factors. Consumers—particularly those not directly impacted by early pandemic job losses--were largely flush with cash. The stock market had rebounded and was setting new records, few were spending money on experiences (travel, etc.) and many had stimulus checks in hand. Massive spikes in spending helped fuel even greater growth from the retailer categories that suffered least during the pandemic (I.E. those not impacted by shutdowns) and it helped revive many chains that had survived their own bankruptcy ordeals and were emerging with leaner and meaner balance sheets (at least, some of them were). By the second half of 2021, retail space demand was spiking and this trend carried over deep into 2023.
But spiking inflation by 2022 started to bring retail spend numbers back to earth, even as the categories most negatively impacted at the height of the pandemic (entertainment, restaurants, traveldependent concepts, etc.) were finally starting to recover. Retail spending has not dipped into negative year-over-year territory over the past two years and early Holiday Season 2024 data indicates we likely saw a strong turnout from consumers driving gains of 3.5% or more. But the double-digit sales gains of 2021 and 2022 have been replaced with gains slowly coming back towards 2.0% to 3.0% overall while some categories have veered into negative growth. The net result has been the trend of rising bankruptcies that we started to see in 2023 only intensified in 2024.
Entering 2024, the biggest driver of store closures was the drug store sector. Rite Aid, which had filed bankruptcy in late 2023, was still in the process of closing hundreds of stores. The Pennsylvania-based chain emerged from Chapter 11 in September of 2024, having closed more than 700 stores across the USA. Meanwhile, both Walgreens and CVS were in the process of multi-year rightsizing campaigns with plans to close 300 stores each across their respective brands in 2024. In October 2024, Walgreens would up the ante. In a conference call, their CEO stated that 25% of their roughly 8,700 stores were no longer profitable and that the chain intended on closing 1,200 stores through 2027 (500 in 2025, with the remaining 700 units split between 2026 and 2027). In 2024, Walgreens closed four local stores and reportedly will be shutting down another two to three units in Q1 2025. CVS closed two stores. Dollar Tree has taken two former drug store locations locally, though both locations had footprints smaller than the typical CVS and Walgreens template.
This could prove to be both a challenge and opportunity in 2025. The modern drug store model is between 15,000 SF and 18,000 SF with drive-through windows. These are buildings that generally will not be demised or divided into multiple suites easily. Redeveloping drug store pads may be one of the biggest opportunities of the next few years and might become one of the biggest emerging trends in retail development of 2025. Unfortunately, we simply are not tracking a large amount of demand for space in the 10,000 SF to 20,000 SF range with only a few major players actively expanding in this size range (i.e. Trader Joe’s, Fresh Market, DSW, Natural Grocers by Vitamin Cottage are among some listed by The Brown Book). However, the liquidation of Party City and the likely liquidation of Joanne’s will provide users like those with easy options for second-generation space.
It is also important to note that despite the recent uptick in store closures and bankruptcies, we are still tracking strong demand for space—though certainly not at the same levels we saw emerging in late 2021 and carrying over to 2023. Those levels of demand were enough to keep Sacramento region vacancy flat in 2024, despite heightened closures and the modest return of new development in the region.
Our tracking of more than 12,700 retail space using concept active across North America via our owned subsidiary, The Brown Book, is continuing to show significant demand for spaces of 5,000 SF or less driven overwhelmingly by restaurants (QSRs in particular, though fresh casual dining concepts and fine dining concepts are also hot), beauty concepts (beauty supply/cosmetics/fragrance retailers, as well as salons, and a rising wave of aesthetics/ MediSpa concepts), pet care and veterinary concepts and new apparel brands (domestic and foreign, with a strong smattering of DTC and luxury concepts) are among the most active growth categories.
We are also tracking strong demand for junior box opportunities in the 20,000 SF to 30,000 SF range. This is being driven by grocery (traditional grocers are in modest growth mode, while discount, ethnic and organic concepts are more aggressively expanding), gyms/health clubs and fitness concepts, off-price apparel (the usual suspects), discounters (from bin stores to home goods retailers), as well as a mix of formerly large box players that are exploring smaller footprints ranging from department store giant Macy’s (who is ramping up growth of their 30,000 SF – 35,000 SF open-air shopping center template even as they accelerate 66 closures of their full-line mall-based department stores) to Kohl’s (who is also planning on closing at least 27 stores in 2025—all of which are 70,000 SF - 90,000 SF—while continuing to open smaller format 30,000 SF units in new markets).
Much of the recent uptick in bankruptcies and store closures has included concepts whose stores were in the 30,000 to 40,000 SF range, particularly Conn’s Home Plus and Big Lots. The same was true in 2023 when Bed, Bath & Beyond liquidated and closed over 800 stores across its banners. Those stores were 90% backfilled
within 15 months thanks to growth tenants like Ross, TJ Maxx, Burlington, etc.
In that size range we have recently seen vacant stores backfilled by a mix of concepts including Michaels, Nordstrom Rack, Ocean State Job Lots, Trader Joe’s, Barnes & Noble, OneLife Fitness, Curl Fitness, 24 Hour Fitness, Sky Zone, Ollie’s Bargain Outlet, Fresh Market, HomeGoods, and others. That said, there are not enough active players growing aggressively that we will see the same speed in backfilling Big Lots locations as we saw with Bed, Bath and Beyond a little over a year ago.
The reality is that the Sacramento shopping center market has held its own over the past two years despite a rising wave of bankruptcies and store closures. But moving into 2025, vacancy levels are going to finally start to climb. It remains to be seen whether this will be a short-lived trend or not. Analysts at Moody’s have suggested that the worst of this current wave of retail bankruptcies will likely be over before midyear. We think this will hold true if the economy continues its current wave of improvement in 2025, particularly if the new administration’s plans for tax cuts and deregulation spur economic growth. But we see other stated plans from the new administration that could create massive headwinds for the economy, with the retail sector bearing much of the brunt of the pain. We discuss this in the forecast portion of this report, but we see two distinctly different economic scenarios ahead—one positive and one negative— that could play out in the year ahead with those outcomes entirely dependent upon which policy promises the Trump administration follows through with or not.
HOBBIES AND HOME RELATED HARD HIT IN 2024
Home goods (from DIY and hardware stores to furniture and furnishings concepts), hobby and apparel retailers were among the hardest hit categories of 2024. Home related retailers have faced a double whammy; sales spiked in 2020 and 2021 when homebound consumers splurged during the pandemic. For big ticket items especially (furniture and large appliances that consumers typically only purchase every few years), it was inevitable that sales would eventually falter. But the wave of inflation that followed and interest rate hikes from the Federal Reserve trying to contain it cast a chill over the housing market. These concepts fare best when the housing market is robust. Consumers buy more furniture when they are moving into new homes. DIY and hardware stores tend to fare better because homeowners tend to fix up their homes either when they are getting ready to sell them or when they are moving into new ones more than when they are staying put.
The Federal Reserve closed 2024 with three consecutive interest rate decreases, which should eventually spur greater housing demand. It is enough that DIY giant Lowe’s is already planning
to return to growth after a hiatus of a couple of years. Lowe’s is planning to open 10-15 stores per year over the next four to five years and is targeting fast-growing cities (Sacramento is the fastest growing metro in California currently). We agree with their sentiment and think that improvement is on its way for home related retail in 2025. The only problem is that the average interest rate for a 30-year home loan increased over the last couple of months of 2024 for reasons we will discuss shortly.
Hobby retailers, meanwhile, also saw sales surges from homebound consumers during the pandemic, but with the return of normalcy (or relative normalcy) consumers have shifted their spending back towards experiences. Although we have seen some apparel concepts filing bankruptcy in 2024, we don’t see those numbers as being aberrant for the category. Where the challenges have been lately have been with legacy brands, often with debt issues due to leveraged buyouts, as well as some DTC brands that have emerged in the physical store space but whose initial valuations (especially those done in the stock markets feverish 2021 runup) were overblown by Wall Street to begin with.
For example, when the once internet-only shoe concept Allbirds issued their IPO, they had yet to turn a profit, but they were building a huge buzz for the quality of their product and for being ecofriendly. The company soared in value to more than $4.1 billion on its first day of trading in 2021. By 2024, Allbirds had opened more than 60 stores, but its market valuation had been in a freefall the previous two years 97.6% to a current market capitalization of $51.5 million. They spent most of the past year closing stores to cut expenses, even though our sources tell us that none of them were losing money. Entering 2025 they now have 27 stores across the US and have brought in a new management team to turn the ship around.
Regardless, apparel is a mixed bag currently. Off-price apparel, and new brands continue to expand while department stores are ramping up closures and we still have a smattering of mall-based legacy concepts that struggle to differentiate themselves from their competitors, many of which have huge debt burdens placed on them by private equity owners that acquired them via leveraged buyouts.
We also similarly saw an uptick in restaurant chain bankruptcies; however, we don’t see current numbers being aberrant for the category. What is notable is much of the pain is concentrated in legacy casual dining banners and weaker QSR franchises. However, this is the sector where we are also seeing the greatest explosion of new concepts and growth from existing ones. Chicken, coffee, sandwich, boba tea/dessert drink concepts, and Asian QSRs are leading the way in terms of planned units according to The Brown Book data, but virtually every subcategory of restaurant is in growth mode overall.
These were not the only retail categories to see casualties this year. Even in the best of times, winners and losers emerge but the
hard reality is that retail bankruptcies and store closures spiked in 2024, reaching their highest levels since the 2020 pandemic.
BANKRUPTCY BREAKDOWN
The first major bankruptcy of the year was the March 2023 filing of Joann. The crafts retailer managed to navigate that ordeal without closing any stores while reorganizing its debts. They would emerge from bankruptcy in April 2024, but only temporarily…
In March 2024, The Body Shop filed for Chapter 7 bankruptcy and closed all 61 of its stores across the United States. This was followed by the bankruptcy of two more mall-based chains. Express filed Chapter 11 and closed 95 of its roughly 530 stores nationally (and all ten of its UpWest stores). A consortium led by mall owners Simon and Brookfield bought them and their Bonobos banners out of bankruptcy but both units have continued to rightsize since under new ownership. Upscale men’s apparel retailer Ted Baker also filed Chapter 11 in April 2024. They closed all 31 of their boutiques across the US, though they still operate as a wholesale brand and DTC brand in addition to operating multiple store-in-store spaces at select Bloomingdale’s locations.
Red Lobster filed for bankruptcy protection in May. The casual dining seafood chain entered 2024 with 650 restaurants across the US but had already been in the process of closing underperformers at the time of their filing. They emerged from bankruptcy in September and now operate 517 restaurants across the nation.
In July 2024, Conn’s Home Plus (owner of Badcock Home Furniture) filed for Chapter 11 protection and opted to wind down their business. They closed more than 550 stores across both banners. Conn’s operated 186 stores at the time of their filing with an average store size of 38,000 SF. Badcock operated 340 stores averaging 12,000 SF per location. All told, the liquidation returned more than 11.1 MSF of space to market nationally, though neither concept had a presence in the Sacramento region. Conn’s had overextended itself purchasing the Badcock chain from The Franchise Group in 2023. The Franchise Group (operator of Pet Supplies Plus, The Vitamin Shoppe, Buddy’s Home Furnishings and American Freight Furniture) itself filed
for Chapter 11 protection in November 2024. That bankruptcy ended with the liquidation of American Freight Furniture (all other brands remain in operation and did not see significant closures). American Freight had 330 stores nationally, with units averaging 28,000 SF in size. All told, the chain’s liquidation returned over 9.2 MSF of space to the market. American Freight operated two local stores: Rancho Cordova and Sacramento.
LL Flooring (formerly Lumber Liquidators) filed bankruptcy in August. The chain liquidated its remaining 94 store locations across the US, including one in Elk Grove (which has since been backfilled by a local concept called Home Outlets).
Big Lots filed Chapter 11 bankruptcy in September 2024. The chain had roughly 1,400 stores across the US at the time of its filing and had closed nearly 700 units by mid-December when it announced that it had failed to find a buyer in bankruptcy and was going to liquidate the remainder of the chain. On December 27th, a last second deal with Variety Wholesalers emerged.
Variety Wholesalers (a South Carolina-based discounter that operates the Roses, Roses Express, Maxway, Bill’s Dollar Store and Bargain Town chains) will buy a minimum of 200 stores from Big Lots and possibly as many as 400 (as well as a couple of distribution centers). Details of which stores will remain open have not yet been released. However, since Variety Wholesalers is overwhelmingly focused on the Southeastern US, we think it is likely that Big Lots locations in, or adjacent to, their existing markets are the ones most likely to remain open. All seven Big Lots stores were closed in the Sacramento market in 2024 and the retailer’s presence in California was down to just 16 stores as of the beginning of 2025. With average store sizes of 32,000 SF, the collapse of Big Lots added roughly 22.4 MSF of additional vacancy to the market nationally in 2024. It will add an additional 8.1 MSF – 16.2 MSF of vacancy to the market in 2025 (depending on how many stores are kept by their new owner).
Unfortunately, over the course of Q4 2024 the pace of those bankruptcies has only intensified.
True Value Hardware filed Chapter 11 in October. True Value, a franchise system that serves roughly 4,500 independent hardware retailers across North America was bought by rival independent hardware franchisor Do It Best in a deal that closed in November 2024. Because True Value stores are independently owned, this bankruptcy will not result in any store closures of which we are aware. Do It Best will maintain the True Value banner and operate it as an independent division of the company.
Channel Control Merchants, owner of the Dirt Cheap chain, also filed for bankruptcy in October. The overstock and closeout concept operated 68 stores at the time of the filing and has announced plans to close all of them by the end of January 2025. This concept was active across the Southeastern United States and closures will not impact the Sacramento market.
In December the Container Store filed for Chapter 11 bankruptcy protection. The concept, which had been opening new stores as recently as September 2024, expects to emerge from bankruptcy as a private company with new financing. As of January 15, 2025, there were no plans to close any of the chain’s 108 stores nationally, though until they emerge from bankruptcy proceedings that could change. They have one store locally at the Howe Bout Arden center in the Arden/Howe/Watt submarket.
Party City also filed for bankruptcy in December. This was the concept’s second bankruptcy in less than two years. But while they were able to emerge from their October 2022 filing, this one ends with total liquidation. The company had 747 stores at the time of the filing. All locations are currently running going out of business sales and are expected to close their doors permanently by the end of February 2025 at the latest. In the Sacramento region, they have stores in Citrus Heights, Elk Grove, Folsom, Roseville, Sacramento and Woodland.
Which brings us back to Joann. The crafts retailer filed Chapter 11 again on January 14, 2025. If the concept does not find a buyer within the next few weeks, they will certainly be liquidated. Liquidator Gordon Brothers has already made a bid for the troubled concept. Should Joann liquidate, the chain will be closing approximately 840 stores nationally. Their stores range between 12,000 SF and 22,000 SF in size. This could equate to +/- 15 MSF of space coming back to market potentially as soon as Q1 2025. Entering 2025 Joann had five stores in the Sacramento region: Citrus Heights, Elk Grove Folsom, Roseville,
Sacramento and Woodland. Party City stores can range from as small as 7,000 SF to as large as 25,000 SF. Their liquidation will add +/- 16 MSF of vacant retail space to market nationally by the end of Q1 2025.
BANKRUPTCY OUTLOOK AHEAD
Unfortunately, this wave of bankruptcies may not be over yet though Moody’s Ratings predicts that the spike of defaults and retail distress will likely decline in 2025 simply because there are fewer retailers now with weak capital structures (because they have already filed) and that access to capital for at-risk borrowers has also improved.
Moody’s ranks publicly traded brands based on a scoring system that looks at metrics like stock market capitalization and volatility, agency ratings, financial ratios and click patterns from credit managers to estimate a retailer’s probability of filing for bankruptcy within the next year. This scoring system (FRISK) currently lists the following retailers as having an elevated risk of bankruptcy (4.0% to 10.0%) in the coming year; Beyond (the entity that formed when Overstock acquired Bed Bath & Beyond and recently scrapped their plans to relaunch BB&B stores—closing all 11 they had opened earlier in the year), Big 5 Sporting Goods, Children’s Place, Designer Brands (DSW), Office Depot, Rent the Runway and Wayfair.
Moody’s also maintains a scoring system (PAYCE) for privately held companies that is based on a business’ past payment behavior and its US federal tax liens. They suggest that there is a 10.0% to 50.0% chance that the following retailers may file bankruptcy in 2025; Blue Nile, Camp, Everlane, Francesca’s, FYE, Flossier, Hudson’s Bay Company, Living Spaces. Lunya, Madison Reed, New York & Co., PacSun, Rainbow USA, Rue21, UNTUCKit, Vineyard Vines, and The Walking Company. They suggest that there is a 4.0% to 10.0% chance of bankruptcy for At Home, Backcountry, Bargain Hunt, Dormify, Fanatics, Gabriel Brothers, and the Rue Gilt Groupe.
Moody’s current bankruptcy watch list includes Guitar Center, At Home, Beyond, Big 5 Sporting Goods, the Children’s Place, Office Depot, Kirkland’s, Rent the Runway, and Wayfair among the publicly traded corporations. Among privately held retailers, their current watch list includes Blue Nile, Camp, Everlane, Francesca’s, Glossier, Hudson’s Bay Company, JP Outfitters, Living Spaces, Lunya, Madison Reed, New York & Co., PacSun, Rainbow
USA, Rue21, UNTUCKit, Vineyard Vines, The Walking Company, Backcountry, Bargain Hunt, Dormify, and Designer Brands (DSW).
Heading into 2025 we are more concerned about the automotive and dollar store sectors—both of which might be hard hit by the incoming Trump administration’s promise of across-the-board tariffs on all imports. The Trump plan currently calls for minimum tariffs of 20% that for some global trading partners could go as high as 100%. Both the automotive retail and dollar store sectors are heavily reliant on imports and these moves may happen even as both categories are downshifting after years of aggressive growth. The automotive sector is the latest to do so.
In December 2024, Advance Auto Parts announced it was closing 523 corporate stores, 204 independently owned stores and four distribution centers across the Western US. The chain, which operates roughly 4,800 stores across the US, and Canada, is pulling out of California entirely. Sacramento region closures will include five Advance Auto Parts stores and two CarQuest Auto Parts stores in the region. Advance Auto Parts Stores average between 6,000 SF and 9,000 SF in size. The closures are expected to be completed by the end of Q1 2025 and will return about 5.1 MSF of space to market.
As challenging as the recent spate of closures may sound, it is critical to remember that while we are seeing accelerated contraction from some key players and certain categories, the market also continues to see aggressive growth from the nontraditional merchant categories.
Restaurants remain in aggressive growth mode overall; QSR giants like Chipotle and Starbucks remain extremely active (both actively pursuing drive-thru sites with plans to open 200-300 units in the coming year). Chicken concepts from Chick Fil-A and Raising Cane’s remain in aggressive growth mode with newer players like the Shaquille O’Neal-backed Big Chicken, Dave’s Hot Chicken, Slim Chickens and more than 30 other national players planning on opening a minimum of 20 restaurants each in 2025. Coffee, boba tea/dessert drink, poke, Asian fusion, and rising sandwich brands continue to aggressively expand (Jersey Mike’s and Jimmy John’s leading the way). Even within the casual dining segment, there is a stark divide between in performance between large legacy chains (where most of the contraction is occurring) and new upstart concepts, particularly those focused on breakfast/brunch or built around craft brew themes (where we see multiple regional players putting up solid growth numbers). Meanwhile, fine dining remains in aggressive growth mode in most major markets.
Beauty concepts ranging from traditional cosmetics retailers to MediSpas and elite salons remain in expansion mode, as does the Gym/Fitness Club category which continues to rebuild following the challenges of the pandemic years.
The reality is that while traditional merchants may have closed more stores than they opened in 2024 (the first time this has
happened since 2020), restaurants, grocery stores, fitness clubs, veterinary concepts and a slew of non-traditional space users have all remained extremely active nationally and locally.
Ultimately, it will be the performance of the economy that will determine whether the bankruptcy spike of 2024 was just a blip or if retail, after a three-year growth run may be seeing the return of more challenging times. If this proves to be the case, national shopping center vacancy is at the lowest level it’s been in more than 15 years and most landlords will be well situated to face a choppier market.
Keep in mind that even with closures on the rise, rents have been climbing the last two years (both nationally and in the Sacramento region). The current average asking rent for shopping center space in the Sacramento region is $2.15 per square foot (PSF), on a monthly triple net basis. This number has increased by 4.9% over the past year and has outpaced all other commercial real estate product types in the region.
Meanwhile, though new development has been gradually ramping up, very little is moving ahead speculatively. With construction costs still ranging roughly 30% to 35% above where they stood in 2020, most projects still don’t pencil. Sacramento has been averaging just 250,000 SF of new space per year since 2020 with most of it delivered with anchor and many inline tenants already in tow. We are currently tracking 258,000 SF of space in the new development pipeline—most of which is slated for 2025 delivery and nearly all of which is in the form of long-planned additional phases or pad buildings at existing centers. We are aware of just one major planned shopping center about to begin construction— the 744,000 SF Baseline Marketplace center in Roseville. Phased development of this Costco-anchored power center is set to start in Q1 2025 with deliveries starting in 2026.
LOOKING AHEAD
Retail’s fortunes in 2025 will rest heavily on the policy decisions of the new Trump administration.
Heading into 2025, the US economy appears poised for growth. The Federal Reserve appears to have (for now) pulled off what many economists thought nearly impossible; a soft landing for the economy in their battle to contain inflation. Inflation, though still elevated from the Fed’s target of 2.0%, has been in the mid2.0% range throughout most of Q3 and Q4 2024. But as recent developments in the bond market demonstrate, that battle may not yet be over.
Unemployment as of December 2024 stood at just 4.1% with that month’s job creation of 256,000 new positions ranking as the second highest of the year. Meanwhile, the latest Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics indicates that as of November 2024, there were 8.1 million available jobs in the US. While this is down from the postpandemic (and all time) peak of 11.5 million in December 2021,
these numbers remain far above historical averages. From 2015 through 2019, this metric averaged 6.4 million. In other words, the early indicators suggest strong employment growth ahead.
Retail sales have remained strong with early holiday sales projections showing a 3.5% annual increase. Meanwhile, the National Federation of Independent Businesses reports that as of December 2024, their Small Business Optimism Index had increased 3.4 points to 105.1 in December, its highest reading in six years. All of these are extremely positive signs for business growth in the coming year.
But not all the indicators are rosy. Though retail sales have remained in positive territory throughout the past couple of years of heightened inflation, this is largely because Americans have taken on massive amounts of new debt. In 2021, Americans owed roughly $800 billion on their credit cards. That number is now approaching $1.2 trillion. Worse yet, the average interest rate on that debt in 2021 was 16.5%. Today the average interest rate on US credit card debt is nearly 24.0%. Against the backdrop of a recent wave of notable retail bankruptcies, that sector may prove to be the canary in the coalmine in 2025.
The good news is that wage growth has been outpacing inflation each month since February 2023. A gradually improving economy over the course of 2025, particularly if not at a pace that sends inflation back skyward and prevents further interest rate cuts or necessitates a return to interest rate hikes would be optimal.
The bond market is already reacting nervously to recent economic numbers. Bond yields have spiked globally with the 10-year Treasury up half a percentage point in December alone. Modest upticks in the October and November 2024 inflation readings plus the unexpected strength of recent jobs reports have been factors suggesting that the economy may still be too hot and that the battle with inflation may not be over. Adding to these concerns are investor nervousness over policy uncertainty, global unrest, and the potential impacts of tariffs. We think that much of this uncertainty will lift over the first six months of the new administration, but for now, the impacts of recent bond market spikes have been real and felt primarily by the real estate sector.
Despite three consecutive drops in the federal funds rate by the Central Bank over the final months of 2024 (from a range of 5.25% to 5.50% in September to 4.25% to 4.50% in December), mortgage rates are now higher than they were a few months ago. At the start of 2024, the average rate on a 30-year, fixed rate mortgage stood at 6.62%. This number fell to a low of 6.09% in September but has since climbed to 7.01% as of January 15, 2025. This is because while the Federal Reserve’s monetary policy is one of the top factors impacting interest rates, it is not the only factor. Fiscal policy, trade policy and the strength of the US economy are also factors that influence the rates passed on to consumers.
All these factors will be center stage for the new Trump administration as it takes power in January with the bond market playing the potential role of spoiler. Expected tax cuts and deregulation from the new administration will assuredly spur business growth and economic output in 2025. However, major tax cuts without significant reductions in government spending will increase the deficit—another concern that could further rile the bond market.
But most challenging for retail will be two other promises of the incoming administration.
Promised “across-the-board” tariffs of 20% to 60% would certainly have an inflationary impact if enacted in 2025 though it remains to be seen how much of Trump’s rhetoric may be a negotiation tactic for revisiting trade deals. As this report went to press, Bloomberg was reporting that senior Trump advisors were looking at the possibility of gradual or incremental tariffs to avoid inflation spikes. Whether this proves to be the case or not, we see this as a positive development and signs that incoming policymakers will be keeping a close eye on the real-time impacts of policy. Whether that will translate into the ability to change course quickly, if necessary, remains to be seen. But given the immensely negative political impacts that inflation had for the outgoing Biden administration we struggle to see any new administration not taking inflationary spikes extremely seriously quickly.
That said, the National Retail Federation commissioned a study in November on the Trump tariff proposals. They estimated impacts based on a universal 10-20% tariff on imports from all foreign countries and an additional 60-100% tariff on imports from China based on their impact to six consumer product categories: apparel, toys, furniture, household appliances, footwear and travel goods. Key findings from the study include:
• The proposed tariffs on the six product categories alone would reduce American consumers’ spending power by $46 billion to $78 billion every year the tariffs are in place.
• The proposed tariffs would have a significant and detrimental impact on the costs of a wide range of consumer products sold in the United States, particularly on products where China is the major supplier.
• The increased costs as a result of the proposed tariffs would be too large for U.S. retailers to absorb and would result in prices higher than many consumers would be willing or able to pay.
• Consumers would pay $13.9 billion to $24 billion more for apparel; $8.8 billion to $14.2 billion more for toys; $8.5 billion to $13.1 billion more for furniture; $6.4 billion to $10.9 billion more for household appliances; $6.4 billion to $10.7 billion more for footwear, and $2.2 billion to $3.9 billion more for travel goods.
• For all categories examined, total average tariffs would exceed 50% in the extreme tariff scenario, up in most cases from single or low double digits currently.
The second potentially challenging proposed policy from the Trump administration is mass deportation of undocumented immigrants at the scale that they have proposed. It is estimated that there are between 11 and 13 million illegal immigrants in the US. The challenge here is that it is estimated that somewhere between 40% and 50% of our farm and food production workforce is likely undocumented. Somewhere between 30% and 40% of landscaping workers, home healthcare assistants, housekeepers and nannies are estimated to be undocumented. Additionally, it is estimated that undocumented aliens account for somewhere between 20% and 30% of construction labor in the United States. The restaurant industry is also highly dependent on undocumented workers, particularly for back of house jobs (cooks, dishwashers, etc.). It is estimated that as much as 20% to 25% of that workforce may be undocumented.
While we have no doubt the new administration will take a much tougher stance on illegal immigration and border security issues, but mass deportations in the millions (aside from the logistics and optics of such an enterprise) would create major labor shortages for key industries that typically are reliant on undocumented workers because these are typically jobs Americans don’t want. This could create major impacts for grocery and food retailers as well as restaurants, adding additional inflationary pressures into the mix. It remains to be seen how much of this may have been campaign rhetoric or how far the new administration will take deportations. But it could add another inflationary pressure into the mix. The new administration will be facing the continued challenge of managing an economy on the edge of overheating with delivering on campaign promises in the months ahead. In the meantime, expect retail vacancies to tick up over the first half of the year and for retailers to proceed with more caution with their growth plans as they wait for greater big picture clarity.
Criteria based on: Retail in a Shopping Center. Includes Existing, Under Construction, Proposed, Final Planning
Gallelli Real Estate is a private firm that specializes in commercial real estate services and property management. We believe that as a boutique firm whose understanding of the business runs as deep as our core values, our advantage is large. We take pride in our unique approach to offer more individual solutions that address the ever changing needs of our clients and the industry. After all, our success is measured by the success of our clients and the strength and longevity of our relationships.
