Supply and demand mismatch challenges retail growth

Retail space availability has been steadily creeping downward for years. Pullback on retail construction started after the Great Recession in 2008, and developers continue to be deliberate in their construction plans. Net deliveries in the first quarter totaled 9.5 million for the 139 national index markets in the U.S. This figure is roughly on par with Q4 deliveries but is 27.4% lower than Q1 2019 numbers. Most of the new space being released to the market has also been pre-leased, with an average of only 25% of delivered inventory actually available for lease.

Along with suppressed construction, demolished retail space has also helped push down availability. More than 12 million square feet of retail space has been demolished over the last year, and 155 million square feet have been removed over the past five years.

This increasing scarcity of supply has made it harder for expanding retailers to land desirable space. This mismatch between demand and supply helped push leasing activity down 14.5% from the previous quarter. However, the percent of available space that has been leased remains elevated, at 35.1% over the last 12 months, compared to 31.9% in Q1 2019. This shows that the demand is there, but supply is restraining activity. While there is very little retail space currently being built, proposed construction projects could add an additional 150 million square feet in retail space within the next 2 years, which could help loosen up pent-up demand.

Recent sales comps from restaurants show that sales comps have softened somewhat from previous quarter, although QSRs performed better than traditional restaurants with a 3.3% average gain compared to only 1.8% for the latter. Texas Roadhouse and Chipotle saw very strong Q423 comps. This difference between QSR and traditional restaurant performance points to increased demand for lower-priced options from inflation-weary consumers. Restaurants across all categories have increased promotional activity as a way to encourage repeat visits. Notwithstanding slowing comps, restaurant opening plans continue to tick upward with over 2,500 new restaurant locations announced since the start of the year, with the lion’s share coming from expanding QSRs.

Macy’s recently announced the closures of 150 mall stores over the next three years, with 50 taking place in 2024. As Macy’s exits, the question emerges of what will happen to these vacant anchor spaces. Examples of retailers who have backfilled empty Macy’s spaces over the past few years include home furnishings stores like Arhaus, Crate & Barrel and RH; experiential tenants like Bowlero, Life Time and Surge Adventure Park; and, other retailers including Uniqlo, Hobby Lobby and Home Goods. In some cases, multiple tenants occupy the vacant space. Owners may also choose, where appropriate, to redevelop the spaces into other uses. We’ve seen this in several cases with defunct Sears locations:

• Mall at Stonecrest – Atlanta, GA: Revitalized with addition of aquarium, food hall, coworking space, and health & wellness center.
• Brea Mall – Orange County, CA: Reimagined into a mixed-use property including apartment complex, luxury fitness center, new retail/dining, and nearly 1 acre of green space.
• Foothills Mall – Maryville, TN: Transforming into Uptown – a mixed-use project featuring coworking space, restaurants, retail, hotels and residential space.