The surge in U.S. store closures over recent months paints a grim picture at first glance, with major retailers like Macy's, Family Dollar, Express, and Ted Baker announcing plans to shutter hundreds of locations. The wave of closures and bankruptcies has led many to fear another retail apocalypse. However, retail real estate professionals gathering in Las Vegas for the annual ICSC trade group conference are offering a different perspective: demand for retail space is outstripping supply, and the industry remains robust as we approach the latter half of 2024.
Despite the high-profile closures, brokers and landlords are confident in their ability to lease vacant stores quickly. According to JLL, the overall U.S. retail vacancy rate is a tight 4.1%, with much of the new retail space under construction already pre-leased. This tight market is driving rents to historical highs, particularly in southern states from the Carolinas to Southern California, known as the "smile states," which continue to show strong performance.
Data from Coresight Research reveals that while announced U.S. store openings this year are down about 4% from the prior year, closures have increased by roughly 24%. Yet, openings still outnumber closures, underscoring the sector’s resilience. Chains like Burlington Stores, Ross Dress for Less, T.J. Maxx, HomeGoods, Aldi, and Hobby Lobby are actively seeking new locations, and even nontraditional tenants such as Netflix, which opened its first brick-and-mortar entertainment venue in a vacant Lord & Taylor, are entering the market.
However, challenges remain. Lower quality Class B and Class C malls are struggling more than their Class A counterparts, with the latter seeing increased popularity among retailers. For instance, while Macy's plans to close 150 underperforming stores, high-quality malls are filling these spaces with new tenants such as Arhaus, Bowlero, and Life Time Fitness. The situation is more complex for chains like Rue21, which is closing all 540 of its locations, and for properties like Bed Bath & Beyond and Stein Mart, which have not fully re-leased their spaces since their closures in recent years.
Location remains a critical factor in how quickly a vacant store is leased. Desirable locations continue to attract tenants rapidly, while less attractive spots may linger empty longer. Analysts like Neil Saunders of GlobalData and brokers like Meghann Martindale of Avison Young emphasize the importance of market dynamics and real estate acumen in navigating these challenges.
Additionally, the demand for physical retail space is bolstered by the increase in brick-and-mortar sales. Despite the rise of e-commerce, many consumers continue to value the tangible shopping experience that physical stores provide. This resurgence in brick-and-mortar sales is evident in the robust performance of discounters and experiential retailers, who are rapidly expanding their footprints.
Even with the closure of chains like Express, there is optimism about the future of retail space. The industry’s adaptability, as seen in the varied uses for former big box stores, from fitness centers to entertainment venues, highlights its resilience. As the market continues to evolve, the retail real estate sector appears well-positioned to meet the changing demands and preferences of both retailers and consumers.