Retail closures should free up 140 million square feet of much-needed retail space

Food, fun & wellbeing – leasing activity shifts towards experience-based tenants

Over the past decade, we have witnessed consumers’ focus shift gradually from goods to services and experiences. While the momentum of this growth was short-circuited by COVID, the last three years have seen a recalibration of this trend.

In 2025, service-based tenants are projected to lease more retail space than goods-based tenants, marking a historic shift in the retail property sector. Key service sectors driving this change include food & beverage (F&B), fitness, and healthcare.

F&B expansion will continue to come primarily from quick service and fast casual restaurants like McDonald’s, Chipotle, Dunn Brothers Coffee and Potbelly. Active fitness tenants include Alloy Personal Training, Planet Fitness and Club Pilates. Health tenants include urgent care centers, dentists, and opticians.

Construction activity forecasted to pick up moderately

One of the central challenges in retail real estate remains the lack of new supply and the mismatch between existing supply and demand. We continue to see record low availability pulling down leasing activity by 15.5% from the previous quarter.

Annual construction starts are the lowest they’ve been in the last 15 years. Deliveries decreased 12.1% from the previous quarter, and construction starts sank 49.2%, indicating there will be no immediate relief to the supply crisis.

While construction activity is expected to pick up in coming years, the current forecast calls for a moderate acceleration of retail space delivery.

With retail space availability remaining at 4.7%, the major challenge in coming months will be for retailers to find quality space in desirable locations.

This mismatch between demand and supply will likely continue to impose a ceiling on leasing activity going forward. Nearly 30% of available space is in Class C retail properties, and less than 25% was built this century. Therefore, expanding retailers looking for newer, higher quality space are finding fewer options.

Announced retail closures would free up almost 140 million square feet

Given the marked lack of new supply and with construction starts and current availability at record lows, expanding tenants will need to turn to second-generation space to fulfill at least some of their opening plans.

Announced retail closures total over 9,900 locations, with the highest numbers over the last year coming from discount and dollar stores like Family Dollar and Big Lots, drug stores, apparel stores like rue21, and specialty stores like Party City. This will have profound impact on the availability of retail space, freeing up almost 140 million square feet.

These closures are distributed across different size brackets, but more than 55% of announced closures will be for stores with footprints of 5,000 to 20,000 square feet. There are a number of expanding retailers whose store sizes align with these vacant boxes including Dollar General, O’Reilly Automotive and Five Below. As we saw with other major closures like Bed Bath & Beyond and Toys “R” Us, vacated space in desirable locations will be snatched up first, with the rest of inventory taking longer to fill.

For example – to the chagrin of parents everywhere – Party City is closing all its locations. In a recent auction held for almost 700 of its store leases, there were bids for roughly 250 of the spaces, underscoring again the gap between available space and desirable space. Dollar Tree took almost 60% of the 250 leases and Five Below another 18%. The remainder were taken by bookstores like Barnes & Noble and Books-A-Million; shoe stores like Rack Room Shoes and Cavender’s, and other big boxes.