Consumers resilient despite headwinds

Consumer spending was better than expected in many major markets towards the end of 2022. Nonetheless, with inflation falling but still high in many countries, retail sales are predicted to soften further during the first half of 2023 as disposable incomes are pressured and growth slows, notably in many European countries as well as in North America. A recovery in these markets is anticipated during the second half of 2023 in line with easing inflation. Across Asia Pacific, pockets of strong retail sales growth remain, particularly in Southeast Asia. Meanwhile, retail spending in Mainland China and Hong Kong is likely to see a solid rebound once the current wave of Covid infections abates.

Leasing activity was mixed across major markets during the final quarter of 2022. Retailer demand picked up in the U.S. following a slowdown during the third quarter, and continues to be healthy in the best-performing markets in Asia Pacific. Leasing demand slowed in most European retail markets towards the end of the year, although a number of international retailers continue to selectively look for high-quality retail space in the region.

Future trends: Stronger competition for quality space

Outlook for 2023: The retail sales outlook is expected to diverge through the first half of 2023, with a stronger performance in Asia Pacific and consumer spending under greater pressure in the U.S. and Europe. However, the second half of the year should see improving conditions in these markets, supported by declining inflation. Many retailers remain focused on profitability and operational costs, but the rebasing of rents over recent years in mature markets, geographic diversification by well-capitalized operators, and experimentation with new formats should provide support for the best locations.

Long-term: Construction of new retail space in many developed markets has fallen below historic averages, and this lack of supply will likely support rental growth for the best-quality space in these markets as inflationary pressures ease and growth resumes. Construction activity in emerging markets continues to be more buoyant and retail sales growth will, in most cases, increase more closely in line with the sales performance of individual assets.