Landlords gain leverage as retail supply remains tight

On a recent trip to Atlanta, I took my sister to Flight Club. While she initially questioned the fun of a darts-based experience, by the time we got inside she had changed her mind. Decorated with lush greenery, rich wood accents and textured wallpaper, the venue was beautiful. The electronic scoring and novel dart games kept up both entertained, while the food and drinks were delicious. Flight Club is one example of the novel experiential concepts – social, F&B focused and totally instagrammable – that have emerged in recent years to sate the thirst of consumers for novel, enjoyable experiences.

Flight Club is also one of many chains seeking new locations. And with historically low retail vacancies, chains across the country are competing for dwindling retail space.

Retail net absorption jumped 75.4% quarter-over-quarter to 7.7 million square feet – due mostly to a reduction in move-outs as well as more space taken in community centers, lifestyle centers and Class C malls. In fact, move-outs have declined some 20% since 2021. Leasing activity was pretty much on par with the previous quarter, and the percentage of available space leased over the last 12 months is roughly 33%.

Construction activity remains minimal. Deliveries fell 37.0% from the previous quarter, and construction starts fell 20.8% to a historic low, indicating there will be no immediate relief to the supply crisis. With retail space availability at 4.7%, landlords are gaining more leverage in pricing power. Rents are still on the rise, increasing 0.3% from the previous quarter and 2.6% year-over-year, but the pace of growth continues to slow since its high in 2022.

As more tenants compete for limited retail space, the anticipated closure of thousands of pharmacies – primarily Walgreens, by 2027 – as well as Family Dollar locations will open up more availability for freestanding retail, which has the lowest availability rate of all at 3.3%. The total square footage impact of such anticipated closures will free up roughly 22 million square feet of space, ideal for junior anchor tenants (10,000 – 20,000 square feet) looking to expand.

Retail space available for lease has decreased almost 200 million square feet from its pandemic high in 2020, and more than 400 million square feet since its high after the Great Recession. With intense competition among tenants attempting to nab prime locations, conditions have tilted to a landlord-favorable market. 

As a result, not only do rents continue to rise, but expanding retailers are also jumping on spaces as soon as – and sometimes even before – they become available. Over 80% of retail spaces listed over the last year have been leased within six months; nearly half have been leased within a mere three months. Hence, the average time from space listing to lease execution has compressed to 8.5 months – the swiftest pace in over two decades.

Landlords are wielding much greater pricing power, often holding firm in rent negotiations. They are also being more selective in their choice of tenants. Markets in the South and Southwest continue to see some of the strongest rent gains, propelled by consumption-driven demand and population growth.

Consumer spending on entertainment saw year-over-year growth in the second quarter. Museums, food & beverage, amusement parks and performing arts all saw notable gains. However, the catch-all category, other amusement, which includes golf, fitness and bowling saw the highest increase from last year. Experiential tenants continue to expand steadily in 2024, accounting for 15% of all leasing activity over the past two years. Fitness center openings continue to drive leasing numbers, with Crunch Fitness and Planet Fitness pacing growth. However, expansion in the experiential space is not limited to fitness.

Other entertainment concepts signing leases during the quarter include trampoline parks like Sky Zone and Altitude Trampoline Park, a pickleball franchise, The Picklr, and golf concepts like Monster Mini Golf and Holey Moley. Also of note, is the new deal inked for Netflix House for King of Prussia Mall & Dallas Galleria in Pennsylvania, accounting for over 100,000 square feet of space each.