In a market shaped by limited new supply, retailers are expanding strategically, backfilling spaces quickly and adapting to consumer preferences.
Today, there’s a multitude of factors shaping the retail leasing market. Smaller footprints, the influence of technology, changing lifestyles of younger generations, limited new supply and backfilling closures are just some of the most prominent storylines.
As of the first quarter, the national retail vacancy rate held stable at 4.4 percent, up 10 basis points from the prior quarter, according to Colliers, which covers malls, shopping centers and general retail across 390 markets. “The market remains structurally tight due to limited new supply and steady backfill demand,” summarizes the brokerage firm in its first quarter “U.S. Retail Market Statistics” report. “A clear bifurcation persists, with tight availability for small spaces and more modest availability among large anchor boxes.”
In a nutshell, today’s retailers prioritize smaller, more efficient spaces with strong visibility, easy access and co-tenancy with established traffic drivers along with the flexibility to support omnichannel operations, says Ron Goldstone, executive vice president at NAI Farbman in Farmington Hills, Michigan.
In the first quarter of the year, Continental Realty Corp. executed deals with tenants in the health and wellness category, service-oriented uses, food-and-beverage, children’s schools, entertainment and various franchise concepts in the 1,500- to 2,000-square-foot range, according to Kristina O’Keefe, senior vice president of retail operations for the Baltimore- based company, which owns properties in multiple states across the country.
“We’re seeing a lot of activity in smaller-footprint spaces right now, especially quick-service, food-and-beverage concepts like grab-and-go, smoothies and specialty drinks,” echoes Kassie Murphy, a senior associate with Kansas City-based Copaken Brooks. “Boutique fitness and wellness concepts are also continuing to expand, along with service-oriented uses like salons, kids’ concepts and pet services.”
Jodi Milks, an executive vice president with NAI Wisinski of West Michigan in Portage, lists specific retail brands that she’s seeing expand: Aldi, Kroger, Freddy’s Frozen Custard & Steakburgers, Burlington, Ross Dress for Less and BJ’s Wholesale Club.
“Aldi is just absolutely on a tearright now,” says Walter Wahlfeldt, managing director of JLL’s retail corporate services platform in Chicago. “Trader Joe’s hadn’t done a deal in Chicago in years, and now all of a sudden has decided to move forward with three or four new locations.” In February and March, Trader Joe’s released plans to open more than 15 new locations across the country, including a store in Oswego, Illinois, according to its website.
Wahlfeldt considers Aldi as part of the discount retailer category, which continues to aggressively expand. “With economic uncertainty, people will try to get a deal anywhere they can, so dollar stores continue to expand like crazy,” he says. In April, Walmart unveiled plans to remodel more than 650 stores and to open roughly 20 new stores nationwide.
Another active category Wahlfeldt cites for expansion includes overseas concepts like Miniso, a Chinese retailer that sells cosmetics, stationery and toys, as well as Chinese toy company Pop Mart, which produces the popular Labubu collectible plush toys.
“In a market where new supply remains limited, the tenants that are expanding tend to be the ones that are either very convenience-driven, very value-driven or very experience-driven,” says Sandy Sigal, CEO and president of Calabasas, California-based NewMark Merrill Cos., which owns eight shopping centers in metro Chicago. “Off-price, discount, ethnic grocers, quick-service restaurants, fitness and wellness-oriented concepts all continue to show momentum.”
What Tenants Want
What’s different about today’s retail market fundamentals in comparison with prior cycles is the disciplined approach that tenants are taking, says Daniel Taub, senior managing director and head of retail for Baltimore-based MCB Real Estate.
“Retailers are expanding more selectively, but when the right location becomes available, they move quickly,” he says. “Unlike in past years where growth was often speculative, today’s demand is grounded in performance, data and proven store economics.”
Retailers are much more analytical and strategic in their expansions now, echoes Sigal. “They want the right co-tenancy, the right traffic patterns, the right signage and increasingly they want a space that works for both physical shopping and omnichannel fulfillment.”
Visibility, access, parking and easy circulation matter just as much as square footage for the spaces that today’s retailers choose to lease, according to Taub. They also need spaces that support omnichannel retail efforts, including curbside pickup, efficient back-of-house layouts and customer flow.
The omnichannel trend has influenced the physical stores that retailers lease as they look for more dock space and short-term parking, says Wahlfeldt. Many stores today essentially function as mini distribution centers. Customers can buy online and pick up in store, and they want easy parking spots up front to do so.
Additionally, retailers are concerned with who their co-tenants are. “Being adjacent to strong grocery anchors or other daily needs tenants is often the deciding factor in whether a deal gets done,” emphasizes Taub.
Joe Maguire, principal with Carolina Commercial in Charlotte, North Carolina, says that most of the tenants his firm is working with are focused on where their competitors are and how much market share that they might be able to grab. Carolina Commercial works mostly with midsize to big box tenants and recently opened an office in Evansville, Indiana.
Beyond location and efficiency, another preference for today’s retailers is second-generation or turnkey spaces, says Murphy. “Anything that helps reduce upfront costs and speeds up opening timelines is a big win right now.”
O’Keefe concurs, saying that existing infrastructure plays a big role in retailer leasing decisions. For example, second-generation restaurant spaces with features like grease traps and hoods are especially attractive because they offer meaningful cost savings and faster build-outs.
High Costs, High Competition
Today, rising costs have a hand in influencing most aspects of the retail leasing market. New development remains constrained by elevated construction costs, financing challenges and higher cap rates, states Colliers. Most new development is focused on build-to-suit and small-format projects, particularly for service-oriented tenants.
The slowdown in new development has put a premium on top-tier locations, says Jake Wiseman, a sales associate with NAI Farbman. “National retailers are competing for the best sites, making well-located real estateeven more valuable.”
Undoubtedly, less new inventory hitting the market is causing high competition for what’s available, says Maguire. “But there is only so much a tenant can pay in rent, so creativity is paramount and trusted relationships are more important than ever.”
Average U.S. retail asking rents rose to $25.89 per square foot triple net in the first quarter, up 0.3 percent, according to Colliers. The brokerage firm expects rent growth to remain subdued in the next several quarters as the market works through vacancies from store closures, but strong demand and limited supply should support a quick backfill.
Tight supply is causing retailers to increasingly focus on second-generation space rather than wait for new construction, says Taub. “For landlords, that puts a premium on creativity: re-merchandising space, reconfiguring boxes and solving site constraints in ways that help tenants open faster,” he says. “Owners who can deliver speed, certainty and flexibility are winning deals in this environment.”
For Troy Gerspacher, president of Medina, Ohio-based Gerspacher Real Estate Group/CORFAC International, the fundamentals of retail leasing remain very strong. “Entrepreneur confidence remains high, supporting five to 10-year lease commitments that drive new deals and new construction, whether through new builds or retrofits,” he says. “While some deals fall apart due to construction costs, many entrepreneurs continue to view the market positively, allowing transactions to move forward.”
Murphy echoes this sentiment, saying that there’s still a lot of development in the pipeline in her market, particularly with mixed-use projects. “What has changed is that projects have to be more intentional,” she says. “The ones that are successful are in strong locations and are filling a real gap in the market. Developers are being more selective and often want leasing momentum before moving forward.”
Subdivide and Conquer
In today’s highly competitive market among prospective tenants, vacant retail spaces are backfilled quickly. Examples include medical, fitness, value- oriented retailers and local or regional operators such as self-storage, according to Goldstone. He notes that large box vacancies are often subdivided into more functional footprints.
For instance, NAI Farbman recently worked with Volunteers of America in its backfill of roughly half of a former Kmart store in Marshall, Michigan. “We’re seeing strong momentum from nonprofit and secondhand retailers such as Volunteers of America, The Salvation Army and Goodwill Industries, that are increasingly active in repurposing vacant spaces,” says Goldstone.
Murphy cites a recent example of a 70,000-square-foot former grocery space that was demised and backfilled by AutoZone and Crunch Fitness. She says the transaction reflects the market and the trend of rightsizing vacancies to match tenant demand.
MCB also re-tenanted a large box space with Crunch Fitness. Taub says the user was a perfect replacement since it functions as a traffic-driving anchor. “Bankruptcies and store closures provide the opportunity for owners to reset and strengthen centers, rather than simply replace onebox with another,” he says.
Closures are not the whole story,” emphasizes Sigal. “The real story is who comes in next, and in many cases, the next generation of users is more traffic-oriented and more relevant to the community than the previous one.”
According to Sigal, there are many tenants who have become “experts” at repurposing space, including Burlington, Ross Dress for Less, Marshalls, Harbor Freight Tools and Dollar Tree. NewMark Merrill is working to backfill a former Walgreens space at Lake Meadows, a 179,106-squarefoot shopping center in Chicago that the firm acquired at the beginning of this year. Sigal says interest has come from two soft goods operators as well as an auto supply tenant. “It’s not just about replacing vacancy,” he says. “It is about strengthening the merchandising of the center with tenants that fit the customer, generate repeat traffic and make the center more resilient over time.”
Consumer Effect
For Wahlfeldt, assessing the state of the retail market ultimately comes down to the consumer. “When the consumer stops spending, that’s when you get nervous,” he says. “But the U.S. consumer is spending and really driving the economy.”
Consumer sentiment fell to a record low in April, but the latest data from the U.S. Bureau of Economic Analysis shows that personal consumption expenditures increased by 0.5 percent in February, or $103.2 billion.
Sigal says the biggest storyline is that consumers are still spending, albeit more selectively. “They are looking for value, convenience and experience at the same time. That sounds contradictory, but really it is not,” he says. “People want to save money where they can, save time where they can and still enjoy where they shop.”
Arguably one of the most engaging consumer trends right now is the shopping preferences of younger generations. They have the world at their fingertips via smartphones, but they are still frequenting brick-and-mortar retailers.
For Sigal, the lesson here is that physical retail is still relevant, but it has to feel “discoverable, social and frictionless.” He says younger shoppers such as Gen Z move easily between digital and physical channels. “They may discover online, visit in person and transact either way. They respond well to concepts that feel curated, authentic and event-driven.”
Heavily influenced by social media, these shoppers want a seamless blend of digital and physical interaction, says Maguire. They’re also looking for instant gratification. According to Maguire, 70 percent of Gen Z discovers products on social media but makes the purchase in store.
Murphy agrees. “For younger consumers, a lot of times that online presence is what ultimately drives them into the physical space.” For retailers, these shopping trends mean adapting to a generation that knows what it wants and is more demanding than in the past. “They’re smarter shoppers. That is a given,” says Wahlfeldt. “They can do so much research on their phone in seconds. The good news is that they still want to come into the store and try something on, but they’re not going to just guess.”
In other words, the shopper has already looked online whether the desired size and color is in stock before entering the store. This behavior puts more pressure on data management of inventory so that shoppers who make the trip in person won’t be disappointed.
Looking ahead, sources emphasize the relevance of brick-and-mortar retail. But there’s an evolution toward more experiential, service-oriented and mixed-use environments, notes Wiseman, “with success favoring those who adapt quickly to evolving consumer behavior.”