Stores seeking to grow their physical footprints in the tight North American retail market are likely to face a longer, tougher hunt in the coming year, according to the latest real estate report from Lee & Associates. Retail vacancy rates remained are at or near record lows, and despite a new round of tenant bankruptcies and store closures during the past year, the lack of quality space is crimping some tenants’ expansion plans, Lee concludes.
Against a backdrop of scarce available retail space, intense competition among tenants vying for prime locations is now playing out across the U.S. Developers continue to be challenged to make new ground-up retail development deals pencil at today’s costs at current rent levels. This environment should support further rent gains for landlords and allow supply-constrained conditions to persist for the foreseeable future.
“While store closures weigh on the current level of net absorption, they also provide needed supply for growth-minded tenants,” the report states. “Market participants report exceptionally strong backfill demand for spaces as they go dark, with some locations able to secure rent increases of 40% or more.”
Leasing activity remains concentrated in smaller spaces of under 2500 square feet, where activity is being overwhelmingly driven by growth from quick-service restaurants and personal services. Tenants such as Starbucks, Crumbl Cookies, Yum! Brands (whose holdings include KFC, Taco Bell and Pizza Hut) and Restaurant Brands International (owner of BK, Tim Hortons, Popeyes and Firehouse Subs), all have signed up for dozens of new locations over the past year.
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