What's driving the surge in retail leasing demand?

In markets like Tampa and Boston, retail vacancy has dropped to record lows of less than 3.5% as rents and populations rise.

Thesis Driven dives deep into emerging themes and real estate operating models by featuring a handful of operators executing on each theme. This week’s letter is a guest post by Brin Snelling, Director of Strategy at RetailUnion and a retail real estate market analyst.

Hyde Park Village, Tampa, Florida. Courtesy WS Development.

Not too long ago, retail real estate professionals were forecasting a dire future for retail real estate demand due to the rapid rise in online shopping. Between e-commerce and the global pandemic, many analysts projected that demand for retail real estate would fall dramatically, reshaping shopping centers and ground floor spaces worldwide. But over the past 18 months, the opposite has happened: in-person shopping has returned, and with it demand for retail real estate has taken a dramatic—and surprising—leap.

In 2022, retail absorption hit 76 million square feet, according to JLL, the highest level since 2017. In comparison, absorption in 2019 was 38 million, so retail space is now leasing at a pace double that of pre-COVID. In addition, retail asking rents increased 4.1% in 2022–the most in over a decade—and retail space delivered was a mere third of the retail space absorbed. In other words, demand is higher than supply.

That said, not all retail space is the same, and lower-end retail has continued to struggle. One reason for the supply-demand imbalance is the removal of lower-class retail assets from the market. In 2022, real estate owners took 17 million square feet off the market primarily through demolition or conversion to other uses. For example, the demolition process began last year for Staunton Mall’s ~300,000 square feet and was ongoing in February. In addition, Century III Mall’s 1.6 million square feet outside Pittsburgh, Pennsylvania, is set to be demolished this summer, and there are many more abandoned malls on the chopping block. 

So, what is driving the current demand for retail real estate beyond the removal of older retail assets?

This piece will answer that question by illustrating how demand is being fed by shifting migration patterns across cities, slow development cycles, the lack of high-quality centers, and emerging direct-to-consumer (DTC) brands increasingly seeking a retail presence.