In a historic shift for the retail property sector, service-based tenants are expected to lease more space than goods-based tenants this year, driven by food & beverage, fitness and healthcare. A consumer focus that has been shifting to experiences rather than goods and services is regaining momentum after being derailed by the pandemic, according to a JLL report.
Quick service and fast casual restaurants like McDonald’s, Chipotle, Dunn Brothers Coffee and Potbelly are dominating the F&B expansion, while Ally Personal Training, Planet Fitness and Club Pilates are driving the active fitness momentum. Urgent care centers, dentists and opticians are fueling growth among health tenants.
The retail sector continues to be challenged by a lack of new supply as well as a mismatch between existing supply and demand. JLL said availability is still at record lows, which is pulling leasing activity down by 15.5% from the previous quarter. This challenge is magnified by a 15-year low in annual construction starts, which sank 49.2%, while deliveries decreased 12.1% from the previous quarter. This suggests there will be no immediate relief to the supply crisis although construction activity is expected to accelerate in the coming years, the report said
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Retail space availability stood at 4.7%, which creates a significant challenge for retailers to find quality space in desirable locations. Nearly a third of available space is in Class C retail properties and less than one-quarter of retail space was built in the past 25 years, which is constraining the options available to expanding retailers looking for newer and higher-quality spaces.
Announced retail closures could provide some relief. About 9,900 locations are scheduled to close, with the highest numbers coming from discount and dollar stores, including Family Dollar and Big Lots; drug stores; apparel stores like rue21; and specialty stores like Party City. These closures will free up nearly 140 million square feet of space.
More than 55% of the announced closures are for stores with footprints between 5,000 and 20,000 square feet. This aligns with several expanding retailers including Dollar General, O’Reilly Automotive and Five Below. Major closures like Bed Bath & Beyond and Toys ‘R’ Us will provide the most desirable locations that are likely to be picked up first, while the rest of the vacant inventory will take longer to fill.
For example, during a recent auction for almost 700 Party City store leases, about 250 attracted bids. JLL said this underscores the gap between available space and desirable space. Dollar Tree took about 60% of the 250 leases and Five Below took 18%, with the remainder going to bookstores, shoe stores and other big boxes.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
