Commercial real estate for retail tenants can be summed up by the following:
Soaring demand for retail space. Reduced vacancies. A shift in negotiating power between landlords and tenants.
That’s according to the State of the Market: Retail report from CoStar. The Retail National Report delves deeply into the numbers and statistics of today’s retail environment.
Demand for retail space has increased nearly 42 million square feet during the past 12 months and over 200 million square feet since the start of 2021. This demand has been driven by a myriad of sources.
One of those sources is a pullback in tenant move-outs due to closures or bankruptcies. This is a distinctly positive change after years of aggressive closures following the COVID-19 pandemic.
The most notable factor in the demand is, of course, the supply. The United States currently has the lowest level of retail supply available in recorded history. A minuscule 4.8% of retail space is available as of the publishing of the report in April 2024.
Three distinct retail sectors have contributed the most significant gains to the demand growth:
The spike in food and beverage retail has boomeranged from the COVID-19 pandemic. People are simply ready to return to restaurants.
Experiential retail falls in line right next to food and beverage. After months in the house and behind masks, younger generations are eager to get out and snap Instagram-worthy photos. Enter experiential retail, where the emphasis shifts from transactions to creating immersive, memorable experiences.
From pop-up art galleries to interactive showcases to the silliest of escape rooms, these spaces blur the lines between commerce and entertainment, enticing patrons to linger and engage.
The off-price retail segment is carving out its niche, attracting budget-conscious consumers seeking quality products at discounted rates. This trend underscores the resilience of value-driven shopping in the face of economic fluctuations.
In the last year, leasing activity has plainly slowed. Retail tenants signed for the lowest recorded level of space over the last four quarters since 2020. Small spaces house the bulk of the activity.
A sharp decrease in move-outs is a big factor in the trend. There have been 13 consecutive quarters of positive net absorption. How can a company lease legacy space in a hot market if no one else is moving out?
It’s important to note that this is only true for certain types of commercial real estate. Strip and power centers have record low availability while mall availability remains on the higher end. But retailers aren’t missing the opportunity. Mall staples like Bath and Body Works, Macy’s and Foot Locker are navigating out of malls and into open-air, community-based shopping centers where foot traffic is higher.
Rents are on an upward trajectory, propelled by growing demand and limited availability. Landlords, cognizant of their leverage, are adopting a more selective approach in tenant selection and are holding their positions in rent negotiations.
Eleven of the 12 regions with the fastest rent growth over the past year are in the South or Southwest – regions that are heavily benefiting from tighter availability and lower levels of obsolete space. The Northeast and Midwest are on the other end of the pendulum – seven of the 10 markets with the slowest rent growth were in these two regions. This is likely due to legacy supply and stagnant population numbers.
The construction landscape in commercial real estate is experiencing a deceleration, with historic lows in retail space delivery.
This trend reflects a cautious approach among developers, who are recalibrating their strategies in response to evolving consumer preferences and market dynamics.
Despite many experts warning of a looming recession in or by 2023, retail real estate remains resilient. Consumer spending was unexpectedly buoyant because people wanted to enjoy entertainment and community post-pandemic.