Leasing Blog

U.S. Retail Vacancy Rates Hit 20-Year Low

As we move through 2024, the U.S. retail market is showing signs of both resilience and transformation. Despite economic uncertainties and fluctuating consumer behavior, the retail sector continues to adapt and evolve. Recent data reveals a nuanced landscape where space constraints, shifting tenant demand, and strategic leasing activities shape the future of retail real estate.

Retail Vacancy Rates at Historic Lows

The U.S. retail market vacancy rate has reached historic lows, driven by steady consumer spending and a limited supply of quality retail spaces. According to a report by Cushman & Wakefield, the retail vacancy rate dropped to 5.3% in the second quarter of 2024, marking the lowest level in two decades. This low vacancy rate reflects a growing focus on securing space in high-quality shopping centers, despite the ongoing economic challenges faced by retailers.

While demand for retail space remains robust, it’s clear that the retail market is experiencing a tight supply environment. With only 11.3 million square feet of retail space currently under construction, new supply will remain limited in the near future. As a result, landlords are holding significant leverage in rent negotiations, often opting to wait for more favorable terms before leasing their properties.

Demand and Leasing Dynamics in the Current Market

Despite the constraints on supply, there has been an uptick in leasing activity across smaller retail spaces, particularly those under 2,500 square feet. The demand surge in sectors like quick-service restaurants, personal services, and experiential offerings underscores the need for flexible, strategically located spaces that cater to evolving consumer preferences. Notably, tenants like Starbucks, Crumbl Cookies, and several well-known fast-food chains are expanding rapidly, capitalizing on increased spending on dining out.

Retail space absorption has also seen significant growth. The U.S. retail market experienced net absorption of 7.7 million square feet in the second quarter of 2024, driven by a decline in move-outs and increased leasing activity in community centers, lifestyle centers, and Class C malls. This level of absorption marks a 75.4% increase from the previous quarter, highlighting the active demand for available spaces despite broader economic headwinds.

Strategic Leasing and Development

Retailers and landlords are strategically navigating the current market dynamics. With construction activity at record lows due to elevated costs and financing challenges, new retail properties are seeing higher-than-average leasing rates. This is particularly true for grocery-anchored centers and smaller retail formats within mixed-use developments, which continue to attract significant tenant interest.

The rising costs of retail space are another critical factor influencing market dynamics. Not only are rents on the rise, but additional expenses for fit-out construction, operations, security, and insurance are pushing retailers to reconsider expansion plans. The competitive environment for prime retail space has intensified, with tenants quickly leasing available spaces, often within just 8.5 months—an unprecedented pace.

Looking Ahead: Opportunities and Caution

As we look ahead, it’s clear that the U.S. retail market will continue to operate within a constrained supply environment. This presents both challenges and opportunities for retailers, landlords, and investors alike. Top-tier malls may focus on retenanting and capital improvements, while older shopping centers may need to consider redevelopment to stay competitive. Meanwhile, urban retail is likely to lag in some areas, requiring creative strategies to attract consumers back to city centers.

However, despite these complexities, the overarching sentiment remains cautiously optimistic. The continued evolution of the retail sector, with a focus on experiential and omnichannel strategies, will be crucial in driving growth and maintaining a healthy market balance.

Conclusion: Partner with illi Commercial Real Estate

Navigating the complexities of the current retail real estate landscape requires a strategic approach and in-depth market knowledge. At illi Commercial Real Estate, we specialize in providing professional consulting services to help you optimize your real estate investments and maximize returns. Whether you’re a retailer looking to expand, a landlord seeking to capitalize on rising demand, or an investor exploring new opportunities, our team is here to guide you every step of the way. Contact us today to learn more about how we can help you thrive in today’s dynamic retail market.