Record-Breaking Expansion in Retail Space Amidst Economic Shifts
Despite the challenges of rising costs and evolving consumer spending habits, U.S. retailers have sustained their expansion, leading to a historic peak in occupied retail space. The third quarter of 2023 witnessed a surge in retail space demand by nearly 15 million square feet, continuing an 11-quarter streak of occupancy growth. This increase, coupled with over 14 million square feet of new retail openings, has driven the U.S. vacant retail space to its lowest since the pre-Great Recession era.
Diverse Sectors Fuel Retail Space Growth
The surge in retail space demand is propelled by a variety of sectors, including food and beverage, fitness, experiential retail, discount stores, health and beauty, and medical services. These sectors have thrived on the consumer shift towards value, wellness, and experiences. However, over a decade of limited construction, alongside sustained demand, has led to a scarcity of high-quality retail spaces in many primary and secondary corridors in the U.S. This shortage of desirable locations is slowing the pace of demand growth, now steadying to more sustainable levels.
Freestanding and Neighborhood Retail Properties: The New Favorites
Despite the recent slowdown in expansion pace, retail demand has impressively grown by over 69 million square feet in the past year. Retailers, favoring efficiency and proximity to consumers, have predominantly targeted freestanding and neighborhood retail properties. These types have accounted for a staggering 95% of the total retail demand growth over the last year.
The Mall Segment: A Tale of Diverging Fortunes
In contrast, the mall segment exhibits a divided and dynamic scenario. The past year saw a decline in demand for mall spaces, exceeding 4 million square feet. The segmentation within malls is stark - while luxury and top-rated malls (four- and five-star) have seen increased occupancy, malls with three-star ratings and below continue to experience tenant losses.
Since 2017, demand for retail space in lower-rated malls has plummeted by over 45 million square feet and is anticipated to decline further in 2024. This trend is amplified by major retailers like Foot Locker and Bath and Body Works, who are accelerating their shift from underperforming malls to smaller, more frequented centers.
The U.S. retail space market is undergoing a significant transformation, characterized by record demand, a preference for specific property types, and a diverging mall segment. This evolution reflects broader changes in consumer behavior and economic conditions, reshaping the retail landscape.
Source: Loan Analytics, ArcGIS, Brandon Svec, CoStar