Challenges in Filling Up Retail Vacancies in Commercial Real Estate

RE - Commercial Challenges

By Larry Anweiler, Full-Time Faculty, Purdue Global
Published August 2015

Many of us have noticed that our local retail centers continue to have large vacancy rates since the downturn of 2007. We may also wonder why these centers continue to be vacant despite the improving economic conditions within our local communities. The answer to these questions may be found in the new business model now being employed by small retail business owners.

Rather than limit their markets to small areas around their new retail locations, new retailers look to e-commerce (and its ability to widen markets) as the new sales driver for their operations. The big prize for this group of new retailers appears to be the 83 million Millennials who were born between 1982 and 2000. This group, which represents a larger population than the Baby Boomers, is expected to spend over $200 billion annually starting in 2017.

To access this group, the new retail model forgoes the traditional brick-and-mortar retail model in favor of a virtual presence with sales driven through the Internet. This new model has many advantages for the small business owner, including faster start-up periods, smaller initial costs, and reduced operating expenses as these retailers forgo expensive retail locations in favor of less expensive warehouse locations.

Current vacancy statistics support this observation. While high-end retail locations have filled up in core markets such as Manhattan, San Francisco, Los Angeles, and Boston, vacancy rates in subprime and fringe submarket locations continue to hover above 10%. According to an Economic Snapshot for 2014 report released by Shenehon Company on March 6, 2015, retail vacancy absorption in these smaller retail markets has trended downward by only 20 basis points (or less than ¼ of one percent). This report also show that demand for distribution space has shown positive net absorption for 19 straight quarters and that absorption figures increased by nearly 10% from 2013 to 2014.

It appears that e-commerce and the pursuit of a smaller footprint by retailers has shifted demand from retail locations to distribution and flex-space locations. This shift for suppliers of merchandise has changed the dynamic for demand in store front retail locations, leaving only those businesses that require customer interaction (such as service companies) to fill up vacant centers.

Based on the new economic business model of small retailers, shopping center owners may find it harder to lease small retail space in the future. Additionally, traditional retailers may experience challenges as shoppers move to e-commerce and big box retailers that are able to supply one stop shopping.

Larry Anweiler is a full-time faculty member at Purdue Global. The views expressed in this article are solely those of the author and do not represent the view of Purdue Global.