Beyond the Storefront: Evolving Dynamics in Retail Space Occupancy
Retail real estate has undergone a significant transformation over the last several years, emerging from periods of uncertainty to achieving record-low vacancy rates. As the sector continues to demonstrate its resilience, one can’t help but wonder: who are the retailers filling these spaces; what is driving this surge in occupancy; and how can landlords, developers and tenants capitalize on these opportunities?
Retailers are in expansion mode
In 2024, store opening announcements are exceeding planned closures—with 3,438 openings planned compared to 2,587 closures. This is resulting in a net gain of 851 stores to date. If this trend continues throughout the year, it will mark the third consecutive year of growth—a milestone not seen in ten years.
According to Coresight Research, there are three key sectors driving retail openings:
- 34% come from the discount sector
- 27% belong to apparel, footwear, and accessories brands
- 22% are grocery and convenience stores
Beyond traditional retailers, consumer service providers are increasingly seeking out physical retail locations. Their presence in leased retail space has notably increased in recent years, comprising over 50% of retail leasing as of 2023, up from an average of 46% between 2011 and 2019. Notably, sectors such as food services, education/healthcare, personal services (e.g., beauty treatments, laundromats, car washes), and fitness have experienced the most significant growth in leasing share over this period.
Assuming average square foot requirements and that all planned openings are completed in 2024, we expect net absorption would reach 18.4 million square feet (msf), just shy of the 19.8 msf absorbed in 2023.
Open-air shopping in high demand
Retailers are strategically optimizing their footprints to cater to consumer preferences while controlling expenses and maximizing productivity. Post-pandemic, outdoor formats have emerged as the strongest performers, with landlords strategically assorting centers based on market voids and demographics. Open-air centers maintain an edge over traditional malls and outlet centers due to their proximity to residential areas, presence of essential retailers like grocery stores, and more diverse mix of consumer services. Several beloved mall-based brands—particularly in apparel, footwear, and beauty supplies— have even sought out space in open-air centers.
Retailers are also increasingly experimenting with different store sizes, tailoring locations to local consumer bases and complementing sales from online and other nearby locations. Demand is strongest for boxes smaller than 2,500 square feet (sf) and those larger than 25,000 sf. Despite increased costs, such as construction, rent, and operations, store productivity has surged in recent years, providing retailers with the drive to aggressively pursue desired spaces.
Southern markets continue to show tremendous strength
The South continues to be a focal point for retail growth—a trend that accelerated during the pandemic. Accounting for about half of the national shopping center demand in the last decade, the South’s share accelerated to 55% in 2023. This surge is linked to a shift in household migration patterns and population growth. Nine out of 12 markets with sub-4% shopping center vacancy rates are in the South, illustrating retailers’ prioritization of these markets for expansion.
Shifting migration patterns not only impact which markets benefit, but also reshape retail demand within markets. In 2019, suburban submarkets had vacancy rates that were 100-150 basis points (bps) higher than those in urban areas and central business districts (CBDs). In the last two years, that dynamic has reversed, with suburban vacancy rates now lower than urban counterparts. Since 2020, counties classified as “emerging suburbs” or “exurbs” have seen significant population growth and retail demand. In contrast, while urban cores experienced modest population increases in 2023 after significant outflows in the prior two years, retail vacancies in CBDs remain elevated.
Implications for CRE
The current retail real estate environment presents several implications for landlords, developers and tenants:
- Securing prime retail locations is fiercely competitive due to high demand from retailers and limited availability. Tenants are encouraged to embrace advanced data-driven approaches to site selection and be proactive in lease negotiations to optimize store expansion plans.
- Landlords with a sophisticated understanding of prospective tenants and their value proposition within the shopping center are best positioned to maximize occupancy and revenue targets. Collaboration between landlords and tenants is key to creating engaging retail environments.
- The rise of non-traditional tenants using retail space implies that more flexibility is demanded regarding lease lengths, rent structure, box sizes, community amenities, etc. Developers and landlords will need to be forward-looking on these issues to ensure adaptability as consumer needs evolve.
- Despite challenges, the retail real estate market remains resilient due to strong consumer demand and strategic expansions. While uncertainties persist, opportunities abound for savvy investors and stakeholders.
In this era of transformation, marked by evolving consumer behavior, demographic shifts and more diverse tenant rosters, the retail sector thrives on adaptation. By staying ahead of current dynamics and embracing change, industry stakeholders can successfully navigate the evolving retail landscape and capitalize on emerging opportunities.
