Palm Beach retail leasing has slowed over the past year, with 1.8 million SF leased by Q2 2023, down from 2.4 million SF in Q3 2021. After ten positive quarters, net absorption turned negative, contracting around 62,000 SF. Yet, vacancies remain tight at 3.5% in Q3 2023, below the five-year average of 4.1%.
Strong household and income growth in Palm Beach, outpacing the U.S. average, has led to a substantial increase in household buying power. From 2010 to 2021, Palm Beach saw over 67% growth in real household buying power compared to the U.S. average of 38%. With over $14 billion in household income growth since 2019, Palm Beach County has benefited significantly from new residents, boasting the highest median household income in large Florida markets.
Palm Beach County’s gross real retail sales grew by over 13% in the 12 months through March 2023 despite a contraction in recent months due to inflation and higher interest rates. Sales growth has been particularly strong in sectors like restaurants and general merchandise. Meanwhile, retail construction remains below the 10-year average, and sales volume has slowed, with just over $300 million in trades in the first half of 2023, below the five-year average. Despite this, annual pricing gains remain strong, with over 9% growth as of Q2 2023.
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Leasing Trends in Palm Beach
Net Absorption and Construction Outlook
In Q2 2023, net absorption in Palm Beach contracted by over 62,000 SF, following a positive absorption of 140,000 SF in Q1. The year has seen a net positive absorption of over 70,000 SF. However, this is a significant drop from the 800,000 SF absorbed in the first half of 2022. Factors like limited space availability and slowing immigration and job growth are influencing this decline in demand. These trends notwithstanding, we expect vacancies to remain below 4% in the near term, given the limited new construction starts.
Vacancy Rate Projections by Submarket
Vacancy rates in Palm Beach are anticipated to remain low, with an estimated increase of less than one percentage point in most submarkets through 2025. The prediction noted by CoStar indicates that Palm Beach’s overall vacancy rate will increase by around 0.6 percentage points. Specific areas like Jupiter and Royal Palm Beach/Wellington, with limited new inventory, are forecast to see minimal changes in vacancy rates. However, submarkets like Palm Beach, Boynton/Lantana, Palm Springs/Lake Worth, and West Palm Beach, which account for about 80% of ongoing construction activities, might experience slightly higher increases. The most notable increase, around 1.6 percentage points, is expected in the Palm Springs/Lake Worth submarket.
Comparison with Other Florida Markets
Despite having the fifth-largest retail supply pipeline among Florida markets, Palm Beach maintains a competitive edge with the fourth-lowest vacancy rate in the state for markets with over 50 million SF in retail inventory. The near-term forecast suggests that Palm Beach will maintain tighter vacancy rates compared to other major Florida markets like Sarasota, Jacksonville, and Orlando.
Rent Trends in Palm Beach
Palm Beach’s Retail Rent Landscape in 2023
As of Q3 2023, Palm Beach stands as the market with the second-highest retail rents in Florida, approximately $35.00/SF, trailing only behind Miami. This period has seen a robust rent growth, with annual gains at about 9.1%, significantly surpassing the five-year historical average of 5.7%. This performance has led to an increased rent premium over the U.S. average, escalating from 26% higher in 2020 to over 40% today.
Sector-Wise Rent Growth Dynamics
Strip centers and general retail have primarily fueled the remarkable rent growth in Palm Beach, with annual rent increases exceeding 9.5% as of Q2 2023. Neighborhood centers and power centers also exhibit a similar uptrend, with their rents climbing over 9% annually in the same quarter. The scarcity of well-located retail spaces, a trend both nationally and in the local market, is expected to continue supporting strong fundamentals for these segments.
Submarket Performance and High-End Retail Areas
Every submarket in Palm Beach has experienced year-over-year rent growth exceeding 9% through Q2 2023. The Palm Beach Submarket remains at the forefront, commanding the highest rents, followed closely by Boca Raton North and West and Delray Beach. The high rents in the Palm Beach Submarket align with the area’s affluent demographics and the presence of the luxury retail corridor on Worth Avenue. Additionally, these four submarkets benefit from high population densities, translating into significant buying power. Notably, the Delray retail corridor along East Atlantic Avenue is a sought-after destination, offering a diverse mix of restaurants, entertainment, and retail options near the beach.
Construction Trends in Palm Beach
Overview of Palm Beach’s Retail Construction Pipeline
Palm Beach’s retail construction has been consistently below the 10-year average of 600,000 SF since 2016. Currently, about 510,000 SF of new retail space is under construction, with approximately 380,000 SF delivered in the past year. This trend suggests limited new retail space deliveries in the coming years, with expected inventory additions just above the 10-year historical average of 420,000 SF through at least 2025.
Demand and Vacancy Projections Amid Limited Construction
Despite limited construction, we anticipate healthy demand to maintain low vacancy rates, well below the U.S. average. However, the projected net absorption to slow down in the latter half of 2023, primarily due to a need for more available lease-up space. This balance between limited construction and steady demand is key in maintaining the market’s health.
Submarket Development Focus and Notable Retail Developments
Since 2020, the concentration of retail development in Palm Beach has primarily been in the Delray Beach, North Palm Beach, and Boynton/Lantana submarkets. These areas have seen significant inventory growth, with over 60% of current construction focused in the Palm Beach and Boynton/Lantana submarkets. Notable large-scale retail developments include a 220,000 SF auto dealership in Delray Beach, a 119,000-SF Community Center in Palm Beach, and a 116,000-SF Lifestyle Center in Palm Beach. The full leasing of all these properties underscores the strong demand in the market. Additionally, a 140,000 SF retail property is under construction in the Palm Beach County Outlying Submarket, set to be completed in 2024.
Sales Trends in Palm Beach
Current State of Retail Investment in Palm Beach
Retail investment activity in Palm Beach has seen a slowdown, with just over $300 million traded so far this year, a stark contrast to the over $1 billion traded in the first half of 2022. Despite this recent dip, Palm Beach has historically been a bustling market for retail investment sales, with 2022 seeing a record-breaking volume of over $1.35 billion. The market has experienced a significant pricing appreciation of over 37% from 2019 to Q2 2023, outperforming the U.S. average. However, we expect current economic challenges to temper these pricing gains in the near term.
Significant Recent Property Transactions
The most notable property trade in the past year was a $41 million deal for a retail center comprising over 78,000 SF in the Boynton/Lantana Submarket. Sold by Stiles Retail Group to Yevgeniy Yermakov in February 2023, the properties, including a key tenant like Publix, are fully leased. Another significant transaction was the sale of Bluffs Square Shoppes in Jupiter, totaling over 120,000 SF, for more than $39 million. BPS Partners LLC, a regional developer based in Palm Beach, purchased these Class B retail buildings with anchor tenants like Publix and Walgreens.
Outlook Amid Economic and Interest Rate Challenges
We expect the retail investment market in Palm Beach to remain subdued in 2023, influenced by a slowing economy and the uncertainty caused by higher interest rates. The significant increase in federal funds rates has raised debt costs, leading to caution among investors. This cautious approach will likely keep much of the available capital inactive until the interest rate stabilizes.
Closing Remarks
As we delve into the complexities of Palm Beach’s retail market, it becomes evident that this evolving landscape offers both challenges and opportunities for astute investors. For those eager to navigate these waters with expertise and strategic insight, Lumicre is your ideal partner. Our seasoned professionals stand ready to equip you with insights and customized solutions that align with your investment goals. Reach out to Lumicre to discover how we can guide you in maximizing the potential of your investments in Palm Beach’s dynamic retail sector.