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US Retail Property Sector in Better Shape Now Than Before the Pandemic

No More Supply Glut as Demolition of Obsolete Retail Space Outpaces New Store Construction

Photo Courtesy of William.

Contrary to the expectations of many industry pundits, the retail property sector is in healthier shape now than before the pandemic. Retail availability rates have declined to their lowest levels since before the Great Recession, while average asking rents for retail spaces throughout the country have increased at their fastest clip in well over a decade.

The abrupt turnaround has numerous demand-side drivers, including the trillions of dollars transferred to consumers from the U.S. government to cushion the economic blow from the coronavirus pandemic and a pivot by consumers toward goods when many stores and restaurants were temporarily closed, as Americans poured money into hobbies and home goods.

While an initial surge of consumer spending went toward essentials and e-commerce, more and more has found its way back into stores, boosting the top- and bottom-line results of many retailers and once again proving the value of brick-and-mortar retail as retailers and brands from all sectors announced store expansions. In addition, the prior wave of retailer bankruptcies washed out many of the weaker brands in 2017-2020. As a result, this year has seen the lowest level of retailer bankruptcies and store closures since 2015.

Each of these demand-side factors positively contributed to improving the overall picture for the retail property sector. However, supply-side factors have played an equally important role in bringing about fundamental balance in retail space markets.

Developers added just 34.6 million square feet of retail space during the first half of 2022, which is consistent with the record-low pace of stores added in 2021. In addition, speculative retail space development has become almost unheard of across the U.S., as most newly constructed retail space has a tenant commitment in hand. Just 10.2 million square feet of speculative retail space was built over the past 12 months, significantly below the prior 15-year average of 15.6 million square feet.

While overall new retail construction has slowed across the U.S., demolition activity has increased to record levels.

Over 18 million square feet of obsolete retail space was demolished in the first half of 2022, building on the record 36 million square feet of retail space demolished in 2021. It has often been said that retail is not oversupplied but rather under-demolished, and the repurposing or outright removal of larger, older retail boxes is helping to alleviate this dilemma. The acceleration of this trend has, in large part, been supported by rising demand for other types of space, such as multifamily, medical office and, in certain instances, when public approval allows for it, industrial.

With more retail space being demolished than speculatively built, current development activity is contributing to the tighter fundamentals in the retail sector, an unusual situation for commercial property markets.

Despite growing demand for retail space, this dynamic of heightened demolition and lower new development is likely to continue for the foreseeable future as retail construction starts fell to a multidecade low during the first half of the year and the total amount of retail space under construction currently hovers near its lowest levels on record.

Somewhat surprisingly, as store owners and retailers are bracing for the impact of an economic slowdown, supply and demand fundamentals in the retail property sector are currently on more solid footing than at any time in recent memory.

Source: 2022 CoStar News.

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