Available Retail Space Is Getting Harder To Find in Both Small and Large Size Formats
As demand for U.S. retail space continues to benefit from a combination of strong consumption and limited supply, the amount of available retail space has contracted to its lowest level on record.
Consistent with, and partially driving, the limited availability across the wider retail space market has been a significant contraction in available single-tenant retail space across the United States.
After rising to a five-year high of 3.3% during the depths of the pandemic, the availability rate for single-tenant retail properties has fallen to just 2.4% as of the end of 2022.
The amount of available retail space has contracted across all box sizes over the past two years, though the most significant contraction has been in retail properties measuring between 25,000 and 50,000 square feet, which have drawn strong interest from tenants across a wide range of segments including grocery, experiential, off-price, home goods and sporting goods.
The availability rate for 25,000- to 50,000-square-foot properties rose steadily from 2018 through 2020, as closures and the pandemic drove up the amount of retail space put on the market. However, strong demand and limited new supply have combined to push the availability rate for larger boxes to an all-time low of just 2.5% by the end of 2022.
While large retail locations are attracting strong interest of late, the tightest segment of the single-tenant market since the start of 2021 has been in properties that are sized under 3,000 square feet.
Ultra-tight fundamentals in the small-box segment can be partially traced back to the significant boost in demand for space from quick-service restaurants and coffee shops coming out of the pandemic. Supported by robust growth in consumer spending power and greater adoption of mobile ordering and delivery apps, quick-service restaurants have been a large contributor to small box leasing activity over the past two years.
The single-tenant retail market looks even tighter for first- and second-generation retail assets. A mere 1.3% of single-tenant retail space built since 2015 was available as of March 12, while properties built between 2005-2014 had an average availability rate of just 1.6% on the same date. Single-tenant properties built prior to 2005 meanwhile had an average availability rate of over 3%.
Given the lack of new retail locations in prime corridors, as well as a preference among retail franchises to operate in a standardized store model, many retail tenants looking to expand are choosing build-to-suits, which has contributed to the over 90% prelease rate for under-construction, single-tenant retail properties.
While the supply threat arising from currently under-construction properties is minimal, higher construction, land and loan costs have combined to weigh on construction starts over the past six months, despite strengthening fundamentals. As such, the threat from new supply should remain minimal for the foreseeable future, and barring a significant shock to consumer spending, single-tenant retail space availability looks set to remain tight.