Retail Vacancy Dropped to 4.1%, Lowest in a Decade
Min 1: Decade of Zero Construction Created Permanent Supply Constraint
High costs in 2023 discouraged construction starts and ensured scarcity of new development deliveries in 2024 per CBRE analysis. Retail construction costs rose 6.5% in 2023 and increased further in 2024, albeit at slower rate. There has not been much supply in shopping center space since the great financial crisis according to industry tracking.
Newmark reported lease volume remained low at just 32 million square feet in Q4 2024, which ran 28% below ten-year average. Yet retail remained the only commercial real estate type to show rent gains across month-over-month, quarter-over-quarter, and year-over-year time periods. The combination of suppressed leasing volume and rising rents confirmed landlords held all leverage.
For investors, the supply constraint creates asymmetric upside. An operator who bought neighborhood shopping center in suburban Dallas at 6.2% cap in early 2024 captured 4.3% annual rent growth while zero competing projects broke ground within five miles. Over three years, the NOI compounds 13.6% while replacement cost floors prevent downside.
Min 2: Open-Air Suburban Centers Outperformed Mall Formats
Demand for open-air suburban retail centers increased at faster pace than other retail formats according to CBRE research. Traditionally mall-based retailers explored new formats for expansion as availability rates for mall and lifestyle centers rose nearly full percentage point while neighborhood, community and strip centers maintained stable occupancy throughout 2024.
Charlotte continued attracting new retailers and restaurants although 3.2% availability rate made finding space challenging. Denver attracted new restaurant concepts due to strong local economy and food and beverage industry. Orange County California showed strong demographics continuing to attract major retailers, putting market on pace to record second-highest level of annual rent growth in 2024.
The format divide creates selection opportunity. Investors who focused exclusively on grocery-anchored community centers in growing suburbs avoided the mall exposure that plagued diversified retail portfolios. A REIT that sold enclosed mall assets at 9% caps and redeployed into open-air centers at 6.5% caps captured better demographics, stronger rent growth, and lower capital expenditure requirements.
Min 3: Rent Growth in Sunbelt Exceeded National Average by 100 Basis Points
CoStar stated Sunbelt region should see rents stay above average driven by strong market fundamentals including substantial buying power, higher foot traffic, and limited expansion options. Phoenix, Orlando, and Las Vegas ranked as top three retail markets of year according to data compiled by CoStar Group.
Despite some stores closing, CoStar and Nuveen reported grocery-anchored and lifestyle retail remained resilient with improved foot traffic anticipated especially in Sunbelt region. Competition for prime retail locations remained strong according to MSCI Real Capital Analytics, underscoring sustained demand for well-located properties.
A developer who acquired land for new grocery-anchored center in Phoenix locked in national tenant leases at $28 to $32 per square foot triple-net while construction costs ran $350 per square foot. At stabilized 90% occupancy, the project generated 8.2% yield on cost with 20-year lease terms from investment-grade grocers providing income stability through multiple economic cycles.
Min 4: Corporate Buyers Increased Volume 56% in 2024
Across globe, corporations expanded their real estate holdings in both high-street and suburban districts. This proved especially true in U.S. during 2024, which saw 56% increase in corporate buyer volume according to Newmark analysis. The corporate expansion reflected retailers securing strategic locations before supply shortage drove pricing beyond economic thresholds.
Urban retail faced challenges since pandemic, but deeper look at data showed small-shop space remained extremely tight with availability rate of just 2.6%. Just 6.7 million square feet of small-shop urban retail available nationally. The micro-format scarcity created pricing power for landlords in dense pedestrian corridors.
Small investors exploited corporate appetite. A family office that owned 12 retail properties in Nashville high-street district received unsolicited offers from national retailers seeking to own rather than lease locations. The portfolio traded at 4.8% cap representing 25% premium to comparable lease transactions, extracting maximum value from corporate balance sheet buyers.
Min 5: Experiential Retail Democratized Customer Acquisition
Success of physical retail today extended beyond selling products to creating experiences that cannot be replicated online. From experiential retail concepts to strategic integration of technology within stores, brick-and-mortar reinvented itself to become more immersive and engaging than ever before per industry analysis.
Consumers' preference for in-person shopping remained strong with 67% favoring stores over online channels according to recent JLL study, reinforcing importance of physical retail. Shoppers reaffirmed their love for in-person experiences, proving enduring value of brick-and-mortar stores despite e-commerce maturation.
The experiential shift leveled competition. Small retailers who invested in customer experience, store design, and community events competed directly with national chains on foot traffic conversion. A local boutique operator who transformed three 2,000 square foot spaces into Instagram-worthy shopping destinations generated $450 per square foot in sales compared to $320 per square foot for conventional formats, commanding rental rates previously reserved for national tenants.
The Takeaway
Retail vacancy collapsed to 4.1% nationally in 2024, the lowest level in a decade, while just 0.4% of inventory remained under construction as high costs froze new development according to CoStar data. Asking rents surged 4.3% annually, CoStar's highest growth rate recorded for retail sector, as landlords capitalized on limited supply and sustained tenant demand from consumers favoring physical shopping experiences. Open-air suburban centers outperformed enclosed malls with neighborhood and community centers maintaining stable occupancy while mall formats saw vacancy rise nearly full percentage point, creating format arbitrage for selective investors. Sunbelt markets led rent growth with Phoenix, Orlando, and Las Vegas topping national rankings while corporate buyers increased acquisition volume 56% as retailers secured strategic locations before scarcity drove pricing higher. CBRE forecast retail availability will fall another 20 basis points through 2025 as construction costs ranging from $300 to $500 per square foot keep new supply economically unviable in most markets, making now the window to acquire grocery-anchored centers before cap rates compress and institutional capital reprices the permanent supply constraint.
