The U.S. retail property sector remained resilient in the third quarter, characterized by sustained, though slowing, demand. Retail tenants leased 5.2 million square feet of store space during Q3, the second-lowest total since the sector emerged from pandemic-era lock downs. Only Q1 2024 saw weaker expansion in demand. Retailers face an increasingly challenging environment shaped by changing consumer behavior, shifting market dynamics and increased cost pressures, all of which are putting pressure on leasing. While overall demand for retail space remains positive, the pace of growth reflects a significant deceleration from prior years, as trailing four-quarter net absorption, or the net change in occupancy, fell to just 32.9 million square feet, the lowest level since 2021.

Slowing demand for retail space aligns with an uptick in store closures, as many large retailers, including Walgreens, Family Dollar and Big Lots, have been closing stores. While the underlying drivers behind the store-closing decisions differ, the number of announced closures collectively highlights the challenges currently facing retailers. A largely stagnant housing market, consumers reacting to higher prices and interest rates, and retailers' recent push into off-mall locations have each been a factor in the number of store closures rising to the highest level since 2020. Retail tenants vacated approximately 91 million square feet of retail space in the third quarter, an increase of 7% from the second quarter and the second-highest total in any quarter since 2021.

Lack of Supply Keeps Demand High

The lack of quality available space along major corridors is another headwind to retail demand creation. The amount of available space in the U.S. retail sector finished the third quarter near historic lows at just 4.7% despite the recent uptick in store closures. At the same time, the lack of retail development further limits the location options available for expanding brands. While retail development has been relatively scarce since the Global Financial Crisis, the combination of higher construction costs and elevated interest rates resulted in a significant reduction in the number of retail projects breaking ground over the past two years. Developers added only 11 million square feet of pre-leased store space during the third quarter, the lowest level in over three decades.

While store closings weigh on the retail property sector, they also provide much-needed supply for those tenants who are seeking expansion. Even though the sector faces challenges, conditions within the market remain historically tight heading into the final weeks of 2024. The increase in demand is being driven by tenants in the food services, grocery, fitness, entertainment and healthcare sectors. There is strong back fill demand for vacant space, with some landlords achieving rent increases of 40% or more. On top of that, over half of the leases signed in Q3 were for spaces that became available within the last six months and close to a third were for space that became available within the past three months.



Source: CoStar News

Experiential Retail Leading the Charge

The Denver market has maintained a sub 5% availability rate since late 2022, and current availability has hit a record low of 4.7%, coming in below the 10-year average of 5.4%. Experiential retailers are expanding their footprint across the Denver market; even as available space remains extremely low. SNÖBAHN, an indoor ski and snowboard center, leased 32,000 SF in Thornton for its second location in the Denver area. 3rd Shot Pickelball opened its 33,000 SF club in Wheat Ridge in late 2023, and Epic Pickelball Club opened its 26,000 SF space in Highlands Ranch this spring. Other notable experiential retailers expanding in Denver include American Ninja Warrior Adventure Park, LAVA Island (a children's amusement center), and Lucky Strike.



Source: CoStar News

Retail: Fort Collins, Loveland & Larimer County

Source: CoStar

Retail: Greeley & Weld County

Source: CoStar

Retail Conversions are on the Rise

As large drugstores such as CVS, Walgreens and Rite Aid have closed thousands of locations in North America over the past few years, this has created a new opportunity for developers to get creative in how to reposition this space and its use. Uses include car washes, gas stations, thrift stores, plasma clinics and even dog parks that incorporate a restaurant bar for the owners. Some of these conversions require significant investments in construction to modify the building or, in the case of a new convenience store, the installation of gas pumps. With shuttered drugstores often located in prominent, high-visibility sites, the trouble to convert the large box sites is worth the headache for some.

Drugstore buildings aren’t the perfect candidate for conversion, according to architects who have converted them to new uses. At an average size of 10,000 to 15,000 square feet, they are too large for retailers like auto parts stores or coffee shops. The rectangular shape of drugstores also makes them awkward to subdivide for use by multiple tenants. Only certain uses that can utilize the large footprint are willing to put the capital into the conversion. Healthcare providers remain an active use, followed by auto uses (gas stations, car washes) and one-off retailers like thrift stores.

Source: CoStar News

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