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Vacancies at open-air shopping centres in the US have dropped to historically low levels, defying forecasts of a retail apocalypse caused by the rise of ecommerce.
Landlords of complexes anchored by big-box chains, discount merchants and supermarkets have gained power to raise rents as leases expire. New construction has been stymied by higher interest rates and soaring building costs.
Only 6.2 per cent of outdoor shopping centre space is currently available for rent, according to property data company CoStar, the lowest since it began tracking availability in 2006. The trend stands in contrast with enclosed shopping malls, where vacancies are rising.
Scarcity in the market has disproved long-standing beliefs about retail real estate, said Brandon Isner, head of retail research at Newmark, a commercial property broker.
“They would say, ‘Retail is overbuilt. Retail is struggling. Ecommerce is going to take over brick-and-mortar retail.’ And really none of that has ended up to be true,” Isner said.
Retailers plan to expand further in the years ahead, led by discount chains favoured by inflation-weary consumers seeking deals. Off-price apparel and decor chains Burlington Stores, Ross Stores and TJX, parent of the Marshalls and TJ Maxx store chains, have together added 339 US stores in the past year. Walmart intends to add 150 US locations over the next five years.
“I would say real estate is tight. There’s not a lot of new centres being constructed. And for us, there’s increased interest from other retailers and the types of real estate that we typically prefer,” Michael Hartshorn, group president of Ross Stores, told analysts in November.
The clamour for stores comes despite rapid growth in ecommerce, which enables consumers to shop from home. US ecommerce sales in the third quarter rose 7.5 per cent year on year to $289bn, outpacing a 2 per cent rise in total retail sales, according to the Census Bureau.
But ecommerce sales only accounted for less than a sixth of total US sales. Traditional retailers are discovering that stores are convenient hubs for sending out online orders and processing customer returns. Ecommerce titan Amazon has this year added 21 brick-and-mortar Amazon Fresh grocery stores that accommodate both in-person and online shopping.
“If you want to serve as many grocery needs as we do, you have to have a mass physical presence,” Amazon chief executive Andy Jassy said earlier this year.
The strong demand for open-air shopping centres, typically storefronts facing car parks, differs from the weakening fortunes of many enclosed shopping malls. Mall bulwark Macy’s plans to close 150 stores.
“The renaissance in our industry has been driven by basics and value. It hasn’t been driven by Louis Vuitton and Chanel,” said Adam Ifshin, chief executive of DLC, which owns dozens of shopping centres.
Dour predictions loomed for shopping centres in the years after the global financial crisis as major retailers such as Sears folded. Analysts spoke of a “retail apocalypse”. Lockdowns that followed the arrival of Covid-19 compounded worries over the future of in-person shopping.
At the same time, fewer new centres were opening. Green Street, a real estate research firm, said builders added an average of 0.6 per cent a year to the stock of strip shopping centres between 2009 and 2023, well below the 2.5 per cent of new supply added annually between 2001 and the financial crisis of 2008.
“There really has been very little new construction of the last 10 years. which is probably the biggest driver of the change in the economics and the pricing power of landlords, literally across the country,” said Jeff Edison, chief executive of Phillips Edison, a New York-listed shopping centre owner.
As an alternative to new space, retailers with growth ambitions have been moving into buildings vacated by failed rivals such as Bed Bath & Beyond, which had 480 locations when it filed for bankruptcy in 2023.
Shopping centre rents have averaged nearly $18 a square foot this year, according to CoStar, eclipsing highs reached before the financial crisis. Long cheaper than enclosed shopping mall rents, open-air centres now command an average of $3.52 more per square foot. New leases were being signed at rents as much as 32 per cent higher than the starting rents on expired 10-year leases, said JLL, a commercial property broker.
Green Street estimated that rents in the top 50 markets would need to increase about 65 per cent on average for new construction to be profitable. “At current market rents, developments do not pencil in any market,” the firm said.