Retail has been doing well. Open-air U.S. shopping centers have seen low vacancy levels. CoStar data said only 6.2% of such space was available for lease — the lowest level the firm had seen since 2006. Landlords have gained pricing power to raise rents on renewals.
Retail space availability was at a multi-decade low of 5% in the third quarter, according to Newmark. Only 5.9 million square feet were delivered in the quarter, keeping conditions tight. And although the 29.3 million square feet leased in the quarter was 33% below the 10-year average, it was due to its scarcity, especially for prime retail assets, the report said. “Retail demand for new space outpaces other CRE sectors,” it noted.
Not surprisingly, retail sales have been rising as well. Government data shows that November 2024 retail trade advance sales were the highest since at least January 1992.
However, while this should be great news for investors in retail CRE, there is an aspect that may be less favorable. The Wall Street Journal found that sales by the largest retailers are growing significantly faster than the overall pace.
In 2014, Costco, Walmart, and Amazon accounted for 11% of the total retail sales. Over the last three reported quarters, their combined sales made up 17% of the total and comprised 57% of retail sales growth.
A similar effect appears in groceries. In 2000, grocery sales were about 67% of food-at-home spending. By 2023, that dropped to 54%, according to Department of Agriculture numbers, as the Journal noted. But warehouse clubs and supercenters almost doubled their share of the category to 23%. Even dollar stores, which seemed to do well during the pandemic, are losing market control to Walmart. Evercore data says that more than 20% of Walmart’s membership program participants are on food stamps, meaning they get half off the program’s price.
Party City and Big Lots have both filed for bankruptcy after long periods of closing underperforming stores. The Container Store also followed suit.
In 2023, Costco, Walmart, and Amazon put $47 billion on capital expenditures, about four times what Target, Best Buy, Kroger, and Albertsons collectively spent.
The biggest three have been spending extensively on industrial space, as well as retail. That’s where the potential problem for landlords and investors comes around. Top national chains are chasing Class-A smaller-footprint retail spaces.
"There's been a lot of data and reporting over the past year about limited space in Class A centers squeezing out smaller local chains, and in my experience, that's exactly what's happening," Jared Rothkopf, a CRE attorney at Polsinelli, told GlobeSt.com in October. "Landlords want high credit tenants who can provide better security packages than local startups. Startups need to prove their concepts in less attractive spaces and trade up for better space after they're more established."
With large retailers absorbing more of all business and looking for additional space, that could change market dynamics and put landlords at a greater disadvantage in negotiations.