Smaller Tenants Driving Resilient U.S. Retail Market Forward

Retail growth is being fueled by tenants leasing up smaller spaces in shopping centers.

Leasing activity in the U.S. retail sector has been mostly concentrated in spaces smaller than 2,500 SF this year, driven by quick-service restaurants and personal services, according to a new report from Colliers.

And development has focused on those tenants, too.

“Most new construction focuses on single-tenant build-to-suits and smaller spaces in mixed-use developments, while obsolete spaces, especially in underperforming malls, continue to be demolished,” Colliers National Research Manager for Retail Services Nicole Larson said in a statement. “These conditions position smaller retail tenants to capitalize on the high demand and limited supply, driving market growth.”

Tenants absorbed 7.2M SF of retail space in the second quarter, an increase from the 4M SF of net absorption in the first quarter. Demand was far slower than a year ago, when tenants took 13M SF more than they vacated. 

Larson attributed the slowdown partly to the lack of new development of retail centers and available space, with vacancy maintaining its record low of 4.1%. Tenants have been taking space at shopping centers in record time, according to CoStar data.

Shopping center asking rents averaged $33.61 per SF at the end of the second quarter, up 3.3% from the same period a year ago.

Despite the rise in interest rates, U.S. store openings outpaced closures by 20% in the first half of 2024, according to Coresight.

The boom also correlates with a surge in people dining out, as food and beverage tenants now make up 20% of all retail leasing activity. Food chains including Crumbl Cookies and Starbucks have added locations, as have major fast-food brands like KFC, Pizza Hut, Taco Bell, Burger King, Popeyes and Firehouse Subs.

In addition, experiential chains, which Colliers counts as including Planet Fitness and Urban Air adventure parks, represent nearly 15% of leasing activity.

“As we move into the second half of 2024, the U.S. retail market is poised to continue its cautious yet opportunistic path,” Larson wrote in the report. “Retailers and investors must stay vigilant, adaptable, and forward-thinking to effectively navigate the ongoing economic fluctuations and capitalize on emerging opportunities.”