Resurgence of U.S. Shopping Centers: Tightening Availability and Strong Tenant Demand

The U.S. shopping center, once left for dead unless it had a grocery store anchor, has staged a remarkable comeback.

It's a turnaround that has seen the amount of available space in retail centers of all sizes except malls decline to multi-decade lows thanks to limited supply, consistent demand and a minimal number of store closings, especially compared to 2017-2020 when closures were much more rampant.

Overall, just 7.5% of all retail space within non-mall multi-tenant retail centers was available for lease as of mid-June 2023, a sharp correction from late 2020 when the average availability spiked to double-digit levels during the depths of the pandemic. There is now less space available to rent in America’s shopping centers than at any time since before the Great Recession.

The relative balance between supply and demand has helped maintain overall retail occupancy levels and investor interest at a time when many expected a much-greater depreciation in shopping center values than has occurred to date.

One factor that has contributed to the consistent demand for retail space over the past two and a half years has been the increased diversity of tenants, which has helped drive lower availability across box sizes. From cellular, food and beverage and service tenants seeking out small shop spaces under 5,000 square feet, to larger anchor tenants seeking spaces of over 25,000 square feet, retail availability has compressed across all size ranges.

Smaller store spaces, those under 5,000 square feet, have seen the greatest demand. Availability in the sub-5,000-square-foot space category has contracted by over 14 million square feet over the past year alone, which equates to a more than 6% decline in overall availability in smaller retail spaces. When compared to the end of 2019, availability for in-line retail space has declined by nearly 59 million square feet or 21.5%.

To a lesser extent, the same pattern holds for mid- and larger-center boxes, with space availability declining both on a year-over-year as well as since the end of 2019 basis. Thanks to increasing demand from off-price, grocery, fitness and experiential tenants, retail space availability for stores measuring more than 25,000 square feet has declined the second-most of any space grouping over the past year and since the end of 2019.

This strong demand has occurred despite the recent bankruptcy and resulting closure of the Bed Bath and Beyond chain, and its subsidiary BuyBuy Baby. While the total amount of space available in this segment is still more than 7 million square feet lower than this time last year, availability for over-25,000-square-feet spaces ticked up by 1.2 million square feet during the second quarter, offering much-needed options for expanding retailers looking for locations in that size category.

In another example of just how tight availability is in retail centers, many of these formerly occupied spaces will likely never hit the market but instead are expected to be snapped up by expanding retailers eyeing potential new locations.

For example, Towne Center North is an approximately 89,300-square-foot shopping center along Highway 153 in Hixson, Tennessee, that formerly had Bed Bath and Beyond as a tenant. Dino Crescentini of CREDI Investments, owner of Towne Center North, reported that he was contacted almost immediately by A&G, the firm contracted by Bed Bath and Beyond to handle the unwinding of its real estate commitments, about discount retailer Burlington being interested in taking the space.

Burlington quickly moved to assume the former Bed Bath and Beyond lease and officially signed for the space in mid-April.

“The deal was expeditious, and the Burlington team was all-hands-on-deck to get it done," Crescentini wrote in an emailed response. "Burlington is among the top retailers in the country and will coexist extraordinarily well with our current tenant roster while also helping boost foot traffic and value.

“Leasing a junior box can be difficult and very expensive in today’s environment, especially when you’re targeting the upper crust of retailers. $100+ per square foot for TI’s are the norm these days, turning a 10-year deal into a zero cash flow deal. There are some serious repercussions with a vacant box; co-tenancy violations and rent concessions, curb appeal and optics, etc., all of which can have a domino effect on the center.

“When the circumstances are just right, a lease assumption deal versus a standard backfill can have a profound effect on your ROI and the future of a retail center. While you can’t push rents when a lease is assumed, these deals come at little to no cost and do not disrupt your bottom line — a free deal so to speak. In this case, Burlington was ready to pounce on, not just mine, but I’m sure several other rejected Bed Bath & Beyond leases and they did so with ease.”

Given the rapid contraction of availability in well-located larger spaces, it is not surprising that Burlington and numerous other national tenants are moving quickly to grab what little store space is available.