Power centers show stable vacancy rates and strong rent growth

Big-box retailers seek power center space, a stronghold for retail.

May 17, 2023
  • James Cook

Five months into 2023 and we can see that retail bankruptcies have accelerated from last year due to sustained inflation (although improving) and banking worries. Recently, Bed Bath and Beyond became the tenth retailer on the list to announce bankruptcy. Last year, there were 10 retailers who announced bankruptcy. There may be a silver lining: some of these Bed Bath and Beyond locations may prove attractive to retailers planning expansions such Dollar Tree, Burlington, Five Below, and Planet Fitness.

In the first quarter of 2023, big-box apparel and accessories retailers like Nordstrom Rack and DSW, along with home furnishing retailers including At Home and Mattress Firm, continued to target power center space, helping maintain vacancy at 4.5% and sustain strong rent growth.

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Big box retailers still targeting power centers despite recent move-outs
Power center fundmentals*
Q1 2023 net absorption 0 s.f.
Vacancy 4.5%
Average rent $25.60
Q-Q% Change 0.9%
Y-Y% Change 4.2%
Inventory 800.3 millon s.f.
Under construction 1.4 milion s.f.
Deliveries 0.2 milion s.f.

Source: Costar
*National index markets only

Power center net absorption was basically flat during Q1 2023, thanks to a 29.6% jump in space vacated. The amount of space vacated by retailers (move-outs) in Q1 2023 totaled over 5 million square feet, compared to just under 4 million square feet of space vacated in Q4 2022.

Despite increased retailer move-outs, big-box tenants continue to target power center space. Apparel and Accessories retailers led the pack in retailer move-ins, contributing more than 400,000 square feet of space taken during the quarter. Home furnishings retailers and sporting goods retailer contributed over 250,000 square feet each in absorption. F&B retailers contributed just under 250,000 square feet in absorption during the quarter.

Demand for power center space is bound to increase as big-box retailers execute their expansion plans. Off-price retailers like TJX Companies, Burlington, and Ross recently announced they plan to open 150, 90, and 75 new stores, respectively. Last year, Costco, announced it would open 28 new locations, with 15 opening in the U.S, and Sam’s Club recently announced it would open about 30 new locations over the next several years. Ikea also plans to open eight full-size stores and nine "Plan & Order" points in the U.S. The average full-size store is 350,000 square feet, while Plan & Order points are significantly smaller.

Vacancy remained flat at 4.5% in Q1 2023, helped by relatively low net deliveries

Power center vacancy remained flat at 4.5% in Q1 2023, the second lowest vacancy rate next to general retail’s vacancy rate of 2.5%. Malls registered the highest vacancy rate of 8.8%. 

Average retail vacancy for power centers rose due to the pandemic, peaking at 5.7% in Q1 2021 but has compressed below pre-pandemic levels. For reference, power center vacancy registered at 4.8% in Q1 2019. Current vacancy rates match those seen during Q1 2017, indicating a steady retail recovery from the pandemic.

Relatively low net deliveries helped vacancy remain flat. If we look at the development pipeline for power centers, we can see relatively modest retail development, with 1.4 million square feet of power center space under construction. Current development represents about 0.2% of total inventory, so there should be no supply shocks to vacancy in the near term.

Average power center rents continue to see strong rent gains in Q1 2023

Average power center rents see strong year-over year gains of 4.2% in Q1 2023, which is less than neighborhood centers and strip centers (4.7% and 4.5%, respectively), but greater than malls’ 3.6% rent growth.

Power centers have seen steady rent growth since Q3 2012. By 2014, they would consistently see moderate increases between 2 and 3% until Q2 2022. Despite rent growth dropping below 2.0% due to the pandemic, it would eventually bounce back due to increasing demand in power center space and relatively lower net deliveries.

Flat power center net absorption in Q1 2023 should not be a major cause for concern as big-box retailers continue to target space at these properties. While we are bidding farewell to Bed Bath and Beyond, I’m hoping more discount retailers take over. Why? Where else am I going to find more holographic art of Jack Skellington for $10 dollars in this economy? 

Contact Saul Lua

Research Analyst - Retail