As shopping center vacancy creeps up, small businesses are finding opportunities to occupy prime commercial space that used to be out of their reach.
A recent Cushman & Wakefield report found that the national shopping center vacancy rate rose to 5.8% during the second quarter, a 20 basis point increase from the first quarter and an even bigger 50 bps increase year over year. This softening demand is leading to lower asking rents that are more realistic for nontraditional tenants.
The report noted demand was even weaker during the pandemic, but a wave of store closures coupled with increasing cost pressures is likely to put further pressure on rent growth over the next several quarters. This could be a boon for small businesses and service-based tenants, including health practitioners, yoga instructors and artists, but opportunities will vary by geography, according to a CNBC report.
Cushman & Wakefield senior economist James Bohnaker emphasized that rents are still rising despite growing vacancies. Rental rates are growing at about 2% today, below post-pandemic rental increases of 4%. Medical offices and spas are two categories that have been increasingly renting shopping center spaces.
Gourmet food business owner Andy LaPointe, who has retail outlets in two northern Michigan strip malls, told CNBC that vacancies created by the departure of national brands are a unique opportunity for local retailers to reimagine a space as “an experience and destination that reflects the local community” while avoiding much of the time and expense needed to start from scratch.
“These spaces already had a site selection review, foot traffic, and locals are used to seeing activity in the space. But the magic happens when a small business brings, not a cookie-cutter replacement, but something unique, a place to linger and a sense of belonging,” LaPoint said. “So when a national chain leaves a space, it isn’t just a gap, it’s a canvas for a small, local business to create something lasting.”
As owners work to fill vacancies, many small business owners have been able to secure more favorable terms, including flexible lease lengths, partial fit-outs and even rent-free periods, according to the report. The market dynamics are also allowing small business owners to opt for shorter, serviced or managed office setups that allow them to test a location before making a long-term commitment. Landlords and local officials in some areas are supporting this dynamic to avoid empty spaces that send a message that a center is struggling, although they may be wary of the high failure rate of small businesses and hold out for more stable tenants.
Geography makes a difference in how opportunities are playing out for small businesses. In New York City, for example, demand has kept values high on vacant spaces, which is likely to keep small businesses out of the market. But in communities where big-box stores have failed and data centers haven’t picked up the demand, opportunities for small businesses could abound.
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