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Vacancies at open-air shopping centers in the US have fallen to historically low levels, defying predictions of a retail apocalypse caused by the growth of ecommerce.
Landlords of buildings backed by big-box chains, discount retailers and supermarkets have gained the power to raise rents as leases expire. New construction has been slowed by high interest rates and rising construction costs.
Only 6.2 percent of buyout space is currently available for rent, according to property data company CoStar, the lowest since it began tracking availability in 2006. This is in contrast to closed shopping malls, where vacancies are increasing.
The lack of sales belies long-held beliefs about real estate, said Brandon Isner, head of sales research at Newmark, a commercial property broker.
“They will say, 'The store built over. Marketing is struggling. Ecommerce is going to take over brick and mortar retailing.' And of course none of that turned out to be true,” Isner said.
Retailers plan to expand further in the coming years, led by discount chains popular with inflation-weary shoppers looking for deals. Discount clothing and home decor chains Burlington Stores, Ross Stores and TJX, the parent of Marshalls and TJ Maxx department stores, added 339 US stores last year. Walmart plans to add 150 US locations over the next five years.
“I would say real estate is tough. Not many new facilities are being built. And for us, there's increased interest from other retailers and the types of houses we're choosing,” Michael Hartshorn, group president of Ross Stores, told analysts in November.
The boom in stores comes despite the rapid growth of ecommerce, which enables consumers to shop at home. US ecommerce sales in the third quarter rose 7.5 percent annually to $289 billion, outpacing the 2 percent increase in retail sales, according to the Census Bureau.
But ecommerce sales only account for less than a sixth of total US sales. Traditional retailers are finding stores to be convenient places to ship online orders and process customer returns. Ecommerce titan Amazon this year added 21 brick-and-mortar Amazon grocery stores for in-person and online shopping.
“If you want to serve as many grocery needs as we do, you need to have a physical presence,” Amazon CEO Andy Jassy said earlier this year.
The strong demand for open-air shopping centers, usually storefronts facing car parks, contrasts with the weak demand for many enclosed shopping malls. Macy's bulwark mall plans for this close 150 stores.
“Our business recovery is driven by fundamentals and value. It's not run by Louis Vuitton and Chanel,” said Adam Ifshin, chief executive of DLC, which owns several shopping centers.
Dour forecasts are facing shopping centers in the years following the global financial crisis as major retailers such as Sears folded. Analysts are talking about a “retail apocalypse”. The ban that followed the arrival of Covid-19 increased worries about the future of shopping in person.
At the same time, few new institutions were opening. Green Street, a real estate research firm, said builders added an average of 0.6 percent a year to the stock of shopping centers between 2009 and 2023, less than the 2.5 percent new supply added annually between 2001 and the 2008 financial crisis.
“There has been very little new construction in the last 10 years. “It's probably the biggest driver of economic change and the power of homeownership, literally across the country,” said Jeff Edison, chief executive of Phillips Edison, a New York-listed mall owner.
As an alternative to new space, retailers with growth aspirations have moved into buildings vacated by failed competitors such as Bed Bath & Beyond, which had 480 locations when it applied. sinking in 2023.
Shopping center rents have averaged nearly $18 a square foot this year, according to CoStar, the highest level reached before the financial crisis. Long cheaper than enclosed rents in malls, open-air centers now command an average of $3.52 more per square foot. New leases were being signed at rents up to 32 percent higher than the starting rents of expiring 10-year leases, said JLL, a commercial property broker.
Green Street estimates that rents in the top 50 markets will need to increase about 65 percent on average for new construction to be profitable. “At current market rents, the development is not penciled in for any market,” the company said.