From Overbuilt to Optimized: The New U.S. Retail Landscape

by: Simone Mehdizadeh

Retail vacancy rates hit a 20-year low of 5.4% this summer, down almost 50% from the pandemic peak. Even before COVID-19, vacancy rates were already very high at 9.7% in January 2020. Three key factors are contributing to this historic drop in vacancy; store closings, better tenants, and conversions to mixed-use.

The recent surge in store closures that has ultimately surpassed openings is creating a window of opportunity for opportunistic retail investors across the country. A Coresight Research report highlights that 4,548 stores have closed compared to 4,426 openings, resulting in a net loss of 122 stores (CoStar). This shift has been driven by significant closures from retailers like Big Lots (not to mention many others) which plans to shut 258 locations nationwide. Despite this, according to CoStar, analysts remain bullish that the demand for retail space continues to outstrip supply, indicating a tight market and a substantial demand from various sectors for retail space. This imbalance between the need for retail space and its availability, combined with significant bankruptcy activity closing stores across the country, leaves a window of opportunity for investors to buy retail centers at a discount (due to recent vacancies) and take advantage of the many retailers looking to expand and willing to pay higher/market rents.

Developers are revitalizing shopping centers by introducing more experiential tenants such as entertainment venues, modern restaurants, and recreational activities that attract a broader customer base. This shift started in the mid-2010s when traditional retailers like bookstores were replaced by more trend-driven brands and entertainment options. Experiences like pickleball courts and escape rooms are now major draws. For instance, the State of the Escape Room Industry Report shows that 68% of owners plan to expand, indicating how these new activities boost foot traffic and help retail centers thrive. In today’s retail landscape, centers that incorporate experiential elements and are anchored by major grocery chains like Walmart, Target, or other essential retailers are experiencing significant revenue growth among nearly all tenants, while those lacking such features continue to face challenges.

Many middle-market retail centers that have been hit hard are being redeveloped into mixed-use spaces, combining retail with residential, office, and recreational elements. This transformation creates vibrant community hubs, boosting retail while meeting demand for housing and office space.  It also draws people into retail center locations as a destination and keeps them there as long as possible to maximize the return on investment. For example, Trademark Property Company is reducing retail space by 50% in one of their developments, and adding office, hospitality, and residential components to revitalize the area. Similarly, Paradise Valley Mall in Phoenix now includes residential amenities like a fitness studio and dog park, turning it into a desirable mixed-use destination.

Retail centers are becoming more attractive investments, particularly when compared to apartment and industrial properties with lower cap rates and less value-add opportunities. Our retail clients are finding good investment acquisitions all over the country where they can take advantage of the higher cap rates and add value quickly by utilizing the strategies above. Lever Capital Partners can help secure tailored financing solutions to help investors navigate retail real estate opportunities, secure profitable deals, and maximize returns. Whether you’re looking to finance a retail project or explore new investments, Lever’s expertise ensures you get the best guidance for success.