Open-air center demand surges and vacancy falls

Open-air shopping center demand buoys retail RE performance.

August 17, 2023
  • Saul Lua

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After retail bankruptcy announcements accelerated in the first half of 2023, we are seeing a silver lining. Year-to-date openings announcements are outpacing closing announcements, inflation is improving (with higher interest rates), and vacant boxes left behind by retail bankruptcies like Bed Bath & Beyond have been filled by expanding retailers such as Burlington, Michaels, and Haverty’s.

In Q2 2023, net absorption was driven by demand for open-air retail, with open-air shopping center demand nearly tripling, helping vacancy compress and sustaining strong rent growth.

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Open-air center demand nearly triples in Q2 2023

Open-air shopping centers, which are primarily anchored by groceries and local services, include Community Centers, Neighborhood Centers, and Strip Centers.

Shopping center fundmentals*
Q2 2023 net absorption 6.4 million s.f.
Vacancy 5.3%
Average rent $22.76
Q-Q% Change 1.0%
Y-Y% Change 4.5%
Inventory 3.7 billion s.f.
Under construction 10.9 million s.f.
Deliveries 1.8 million s.f.

Source: CoStar
*National index markets only

Open-air retail net absorption nearly tripled in Q2 2023, reaching about 6.4 million square feet, thanks to a reduction in move-outs and a boost in demand from large tenants. The amount of space vacated by retailers (move-outs) decreased 3.7% from Q1 2023.

Community centers saw a surge in demand, with net absorption rising 121% from Q1 2023. Discounters like Burlington and Five Below took more than 0.6 million square feet while fitness retailers like Planet Fitness and Crunch took over 0.4 million square feet.

Neighborhood Centers saw modest demand, with net absorption rising 54.2% from Q1 2023. Grocery retailers like Publix and Piggly Wiggly leased roughly 0.5 million square feet while F&B tenants leased 0.3 million square feet.

Discounters, F&B tenants, and smaller grocers like Trader Joes absorbed strip center space during Q2 2023.

Vacancy compresses to 5.3% in Q2 2023, despite a 23% jump in new space delivery

Open-air retail vacancy compressed 10 basis points to 5.3% in Q2 2023, which is higher than general retail and power centers vacancy rates of 2.5% and 4.2%, respectively.

Since 2010, average retail vacancy for open-air retail had been on the decline, with vacancy rates falling to 6.3% by Q4 2019, before rising due to the pandemic and peaking at 7.0% in Q4 2020.

Deliveries increased 23.0% from Q1 2023. However, comparing current deliveries to Q2 2019 deliveries (3.6 million square feet), deliveries have decreased 49.6%. Retail development is modest with 10.9 million square feet under construction, an 8.2% decrease from Q1 2023.

Average open-air center rents continue to see strong annual rent gains in Q2 2023

Open-air retail rents rose 1.0% quarter-over-quarter and 4.5% year-over-year in Q2 2023. Among the retail property types, neighborhood centers annual rent growth remains the highest at 4.6%.

Open-air retail saw modest annual rent growth since Q1 2014, with rent growth staying between 2% and 3% until Q2 2021.The pandemic caused rent growth to decelerate briefly around Q2 2020, but it has since bounced back and accelerated, showing strong rent gains.

While we may have had a rough first half in 2023, we made it! Let’s look at the bright side, demand is present for most retail subtypes, construction is minimal, and consumer spending remains resilient.

Contact Saul Lua

Research Analyst, Retail