At first blush, the chart below tells the story of the demise of brick-and-mortar retail in the United States.
"Nearly 140 million square feet of shopping center space was built in the U.S. between 2002 and 2008," says ChainLinks Advisors in its Fall/Winter 2013 Retail Review & Forecast.
"Since then, only 20 million square feet of new product has been developed."
The rise of e-commerce and its impact on physical stores is widely known. Shoppers increasingly tend to spend their dollars at online retailers like Amazon rather than go to a store to make the same purchases in person.
But the lack of development of new retail space is posing another issue to the industry as vacancy rates fall from peak levels hit in the wake of the recession, as ChainLinks explains:
On the surface, when considering [the impact of e-commerce], it would be easy to assume that shopping center vacancy would actually be climbing. Or, at best, flat. But we do actually continue to see growth in the retail sector. And bricks and mortar retailer demand is actually on the upswing.
Certainly, one factor that has helped to bring vacancy numbers down has been the fact that there has been so little new retail development in recent years. Nearly 140 million square feet of shopping center space was built in the U.S. between 2002 and 2008. Since then, we have only seen about 20 million square feet of new product delivered.
Yet, ironically, this is becoming one of the vexing issues in the marketplace. Retailer demand is up and has been for a number of years in some of the strongest performing local economies in the U.S. That demand is heavy for quality, Class A space.
Yet, we have now reached a point where little of that type of space remains available in even the slowest recovering marketplaces. At the beginning of the recovery, we saw the strongest occupancy growth numbers being produced by markets like Washington DC, San Francisco, Boston, New York, Dallas, Houston and other major metros where local economies were ahead of the curve in terms of recovery. Yet, with just a few exceptions, over the past year we have seen metros like Denver, Phoenix, Minneapolis, Atlanta and Pittsburgh supplant them in terms of being growth leaders.
The reasons are two-fold; economic improvement has accelerated in most of the nation’s second-tier markets and is no longer something just occurring in those regions with a strong energy or tech presence. And the other reason for this is the fact that national retail chains seeking to grow are facing challenges in finding any Class A space left in last year’s hot markets.
Does that mean that the marketplace is ready for another huge wave of speculative retail development like what we saw between 2002 and 2008? Absolutely not—but what most major markets are in dire need of and are still only seeing in insufficient numbers are quality redevelopment projects within strong existing trade areas.