Strategies to Solve Retailers' Unmet Expansion Needs

Figure 1: Retail Space Absorption, Deliveries and Availability

Source: CBRE Econometrics Advisors, Q4 2022.

Figure 2: Multiple of Space Absorbed vs. Space Delivered

Source: CBRE Econometrics Advisors, Q4 2022.

Many retailers are scouting Class A malls and shopping centers in prime trade areas for expansion plans. These Class A malls are often the trade area’s centerpiece, ensuring consistently high customer traffic. As a result, they continue to enjoy lower vacancies than the overall U.S. retail market average. Prime submarket availability was 2.8% in 2022, and non-prime submarket availability was 4.9%.

Developers and investors can densify these sites to meet this demand, while also diversifying the tenant base and customer experience with new kinds of stores, restaurants and more. The assets’ established footprints can mitigate risk from economic issues like higher construction cost.

Figure 3: Prime Submarket Availability vs. All Other Submarkets

Source: CBRE Econometrics Advisors, Q4 2022.

Class B and lesser grade malls that underperform can suffer from lack of investment, perpetuating a vicious cycle of underperformance. These malls have an 80% average occupancy rate. However, 60 of these malls, representing almost 54 million sq. ft. of retail space, are in strong trade areas, and may be primarily suffering from competition with one or two other better-maintained nearby malls.

These underperforming malls in strong trade areas can offer redevelopment opportunities that unlock significant value. The Urban Land Institute recently spoke to owners of successful open-air retail properties across the U.S. and determined these commonalities led to success: matching market demand and shopper profile to tenant mix, site design and configuration, and creating a community vision. Vibrant architecture, green space, store space updates, introducing new uses and experiences can refresh a mall’s market position.

Figure 4: Total Footprint of Underperforming Malls by State

Source: CBRE Econometrics Advisors, Q4 2022.

Figure 5: Mixed-Use Retail Rents vs. Total Retail Rents

Source: CoStar, CBRE Research, Q1 2023.

Mixed-use redevelopment is a critical component of placemaking. Reimagining retail sites to add offices, apartments, hotels or other asset classes can often better meet consumer demand, increase foot traffic, and diversify tenant mix. CoStar reports NNN retail rents within mixed-use developments averaged a 23% premium over the last decade. Apartments average 12% premiums and offices average 11% premiums when in mixed-use districts. These reimagined sites have even attracted alternative tenants such as medical or flexible office space operators. CBRE’s 2022 Global Live-Work-Shop Report found:

There is also strong demand for electric vehicle (EV) charging stations in mixed-use redevelopment. The U.S. Bureau of Labor Services estimates over 2 million EV vehicles were on the road in 2021. The amount of EV charging stations must quadruple by 2025 and grow eight times by 2030 to meet projected demand growth, according to S&P Global Mobility. Retail sites with large parking lots are good candidates for this. The EV site operator can benefit from the lot already being graded, developed and tied into the utility grid.

Pandemic-induced remote work and lifestyle flexibility trends are largely here to stay. These trends, coupled with continued housing unaffordability in larger markets, keeps driving tertiary market migration. CBRE’s 2022 Global Live-Work-Shop Report found 41% of people who wish to relocate over the next two years desire a more remote location. U.S. Census data suggests the same, as tertiary markets outperformed both primary and secondary markets in population gain from 2019 to 2022. Tertiary markets accounted for 47% of total U.S. population growth and 62% of net migration, despite containing just 34% of the total U.S. population.

Figure 6: Population Change by Market Grouping, 2019-2022

Source: Oxford Economics, 2022.
Note: Primary Markets include MSAs of 4 million persons and over. Secondary markets include MSAs of 1 to 3.99 million persons. Tertiary markets include MSA's under 1 million persons.

Figure 7: Net Migration by Market Grouping, 2019-2022

Source: Oxford Economics, 2022.
Note: Primary Markets include MSAs of 4 million persons and over. Secondary markets include MSAs of 1 to 3.99 million persons. Tertiary markets include MSA's under 1 million persons.

Lower land, materials and labor costs – as well as less government regulation in many areas – enables cheaper retail redevelopment in tertiary markets than in larger markets. Despite this, foot traffic and sales are often comparable due to less competition.

California offers examples of construction costs varying by regional market size. Weighted average construction costs in tertiary markets like Stockton and Palm Springs are lower than in the primary markets of San Francisco and Los Angeles, according to RSMeans data. Stockton, a beneficiary of migration from large northern California metros, averages around 13% lower construction costs than San Francisco.

Figure 8: California Weighted Average Construction Costs by City

Source: RSMeans data, CBRE Cost Consultancy, Q1 2023.

It is critical to acknowledge tertiary markets are more sensitive to labor market vagaries, given their smaller pool of available laborers, construction companies and contractors. Projects must be executed during times when local worker availability is plentiful since labor accounts for 60% of direct development costs. Opportunities should be carefully evaluated on a market-by-market basis.

The bottom line is U.S. prime retail availability is at an all-time low, while retail development is muted and retailer space demand is up. Construction starts hit a new low in Q4 2022 because economic headwinds have made new development cost prohibitive. This dynamic often creates compelling opportunities for well-thought-out retail redevelopment to fill the gap between supply and demand in today’s U.S. retail market.