The boom in US retail real estate defies predictions of an ecommerce apocalypse

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Open-air mall openings in the US fell to record lows, defying predictions of a retail apocalypse fueled by the rise of ecommerce.

Landlords of complexes anchored by big-box chains, discounters and supermarkets have gained the power to raise rents when leases expire. New construction has been hampered by high interest rates and rising property prices.

Only 6.2 percent of outdoor mall space is available for rent, according to CoStar, the lowest since it began tracking availability in 2006.

The shortage in the market has belied long-held beliefs about retail real estate, said Brandon Einer, head of retail research at Newmark, a commercial property brokerage.

“They saidRetail It is overbuilt. Retail is struggling. Ecommerce is about to take over brick and mortar retail.’ And really none of that could be true,” Isner said.

Retailers plan to expand further in the coming years, with inflation-weary consumers driving discounts, led by discount chains. Off-price apparel and decor chains Burlington Stores, Ross Stores and TJX, parent of the Marshalls and TJ Maxx store chains, added 339 U.S. stores last year. Walmart plans to add 150 U.S. locations over the next five years.

“I would say real estate is tight. Not many new centers are being built. And for us, demand has increased from other retailers and the types of real estate that we traditionally prefer,” Ross Stores Group President Michael Hartshorne told analysts in November.

The boom in stores comes despite the rapid growth of ecommerce, which allows consumers to shop from home. U.S. ecommerce sales rose 7.5 percent year over year to $289 billion in the third quarter, outpacing the 2 percent increase in total retail sales, according to the Census Bureau.

But ecommerce sales account for just under a sixth of total US sales. Traditional retailers are finding that stores are convenient hubs for shipping online orders and processing customer returns. Ecommerce titan Amazon has added 21 brick-and-mortar Amazon Fresh grocery stores this year that offer in-person and online shopping.

“If you want to serve grocery needs as big as ours, you have to have a lot of exercise,” Amazon CEO Andy Jassy said earlier this year.

Strong demand for open-air malls, particularly storefront car parks, contrasts with the weakness of many enclosed malls. Macy’s mall plans Close 150 stores.

“The renaissance in our industry is driven by fundamentals and values. It’s not driven by Louis Vuitton and Chanel,” said Adam Efshin, CEO of DLC, which owns dozens of malls.

Major retailers like Sears were expecting wild predictions for malls in the years after the global financial crisis. Analysts have spoken of a “retail apocalypse”. The lockdowns following the advent of Covid-19 have exacerbated concerns about future in-person shopping.

At the same time, a few new centers were opened. According to real estate research firm Green Street, builders added an average of 0.6 percent of new supply in shopping centers annually between 2009 and 2023, below the 2.5 percent of new supply added annually between 2001 and the financial crisis. 2008

“In fact, there has been very little new construction in the last 10 years. Jeff Edison, chief executive of New York-listed shopping center owner Phillips Edison, may be the biggest driver in changing economics and landlords’ pricing power.

As an alternative to new space, retailers with growth ambitions were moving into buildings vacated by failed rivals such as Bed Bath & Beyond, which had 480 locations at the time of filing. bankruptcy In the year 2023

Shopping center rents have averaged nearly $18 a square foot this year, according to Costar, a record high before the financial crisis. Compared to enclosed malls, open-air malls now command an average of $3.52 more per square foot. New leases signed at rents are 32 percent higher than previous 10-year leases, according to commercial property broker JLL.

Green Street estimates that rents in the top 50 markets would need to increase by an average of about 65 percent for new construction to be profitable. “At current market rents, the development will not perform well in any market,” the firm said.