Lifestyle centers are riding a wave of momentum that shows no signs of slowing.

“Business is extremely good, and we are getting more calls from tenants than we can handle,” said Yaromir Steiner, founder and CEO of Steiner + Associates. Sales at Steiner’s Easton Town Center are up 30% compared to 2019 with relatively full occupancy levels. For any vacancy that does open up, there might be five people who want it, Steiner said. “The two explanations are the pent-up demand for discretionary spending and experiential spending on dining and entertainment,” he said. In some markets, lifestyle centers also are pulling traffic and tenants from underperforming malls.

According to Placer.ai, U.S. open-air lifestyle centers are outperforming their peers when it comes to attracting more traffic. Year-over-year traffic at such centers increased by 2.5% in June, compared with a gain of 2% at outlet malls and a decline of 1% at indoor malls. Then in July, open-air lifestyle centers gained 1% year over year while malls declined 2.8% and outlet centers 3.3%.

One could argue that tenant expansion and small amount of new supply over the past decade have created a high tide that’s lifting all boats. The overall retail vacancy rate across the U.S. dropped to a low of 4.2% in the second quarter, according to JLL. Open-air centers play a dominant role in the leasing activity. According to JLL, net absorption in open-air centers nearly tripled to 6.4 million square feet in the second quarter and accounted for the majority of the 10.8 million square feet of total retail absorption.

Tenants Remain Active

Second-quarter data also shows sustained levels of leasing activity on a year-over-year basis. “We saw a strong surge in leasing activity in open-air centers starting in the second quarter of 2021,” said JLL Americas director of retail research James Cook. “This was driven by strong consumer spending on goods for the home, food at home and quick-service dining.” More recently, leasing activity has been driven by expansion in full-service dining, services and value apparel, he added. According to JLL, the top retail categories opening locations in 2023 are discount/variety at 1,917 new stores, restaurants at 1,035 and apparel a distant third at 275.

“We are seeing this leasing velocity across the board at our properties, not just in our lifestyle centers,” said Brookfield Properties executive vice president of leasing Denise Marsicano. Although there was initially some pent-up demand, traffic is now settling back into a sense of normalcy. The consumer is returning in a very positive way with strong and steady traffic, she said, adding that people want to go out and socialize and are excited about the ability to shop and be entertained and see what’s happening with new food and fashion styles. “In many of our properties, consumers are returning at levels that are surpassing 2019 benchmarks,” added Marsicano.

Demand for Experience

Although consumers are dialing down spending on goods, they’re still looking for experience, said Josh Poag, president and CEO of Poag Development Group. “Experience is the name of the game these days. That was the trend prior to COVID, and COVID really reinforced the need for experience and social interaction in the retail setting.” Poag Development owns or manages 10 lifestyle centers across the country.

Lifestyle centers benefit from the boom in restaurant expansion, as well as tenants that are looking to expand outside of enclosed malls. For example, Poag Development is looking to put a Bareburger at a property that has about 2,000 square feet of patio space. Instead of creating the typical outdoor seating area, Poag Development is working with the tenant to create an interactive space that will include cornhole and space that can accommodate live music. In this case, the restaurant is really blending in with an experience, said Poag.

Fitness is another active leasing category that brings an experiential component, as it can be very social, added Poag. “Not everyone wants to go out and get a cocktail. They may meet up with someone to do yoga or play pickleball.” For example, Poag’s Shops at Perry Crossing in Plainfield, Indiana, pictured at top, features golf simulator concept X-Golf. And open-air lifestyle centers are not just a trend in the Sunbelt. There’s demand for such space in the northern states and the Midwest, too.

Easton Town Center also has interest from online retailers. “After the COVID crisis, online retailers recognized that they needed a double-breasted approach: that they needed to have an online presence and they also needed to have a physical presence in the markets they are serving,” Steiner said. Data from third-party sources is giving retailers an objective view of where the foot traffic is going, and they are coming to landlords of such properties, whereas landlords used to go to the tenants, he said.

Outlook for New Supply

Despite tight vacancies, developers still face hurdles to building new projects: cost, access to capital and anchors. According to CoStar, retail construction starts have been falling over the past year; the 11.9 million square feet of projects that started in the U.S. during the first quarter represented the lowest level since 2005.

Normally, when vacancy is below 5%, developers would jump in to build new projects. However, development costs are extremely high, at $300 to $500 per square foot, according to CBRE Americas retail research head Brandon Isner. “There are only a few markets that can achieve the rents that would justify that construction,” he said. “We might not see another traditional mall built for another 10 years, if ever, and I feel the same way about lifestyle centers.”

There is significant caution from developers and from retailers that are opening new stores. So much has changed with e-commerce, mobile commerce and curbside pickup. Retailers think more about how to appeal to that digital consumer, added CBRE Americas retail asset services managing director Mark Hunter. “We’re not in an era anymore where a retailer will throw up a ton of stores in a market and hope that builds their brand. They can now build their brand online or use data and analytics to select precise locations to maximize their trade areas,” he said.

The challenges of ground-up construction are pushing developers to look at adaptive reuse and redevelopment opportunities. “There is real potential in the mall world for the right kind of malls to be redeveloped as lifestyle centers,” said Poag, “an opportunity to reinvigorate and add life to some malls that have fallen on hard times.” In some cases, those malls may need to be torn down and redeveloped as mixed-use projects with lifestyle center components, and in other cases, they can be repositioned with more experiential anchors and more-vibrant environments.

Poag is bidding on a mall that could be redeveloped to include a lifestyle component. Dillard’s and Macy’s anchor the property, and the tentative plan is to tear down roughly 250,000 square feet in the middle to create a mixed-use property with 400 to 500 apartments and 75,000 to 100,000 square feet of new retail. “We think that 75,000 square feet of retail will be more productive than the former mall because they can do higher-volume restaurants and include more productive tenants,” said Poag.

Densification, including the addition of lifestyle centers, aids new construction both financially and in getting lenders on board. For example, the Austin Business Journal recently reported that NewQuest Properties has proposed a 101-acre lifestyle center development in Kyle, Texas, that will include apartments, retail and restaurants.

Although there are clear challenges to new construction, Hunter sees a bright future for lifestyle centers, as well as an opportunity for the sector to continue to evolve. “Whether it is lifestyle centers or malls, I think you are going to see a continued evolution of more nonretail uses added to active space,” he said. He also expects more blurring of the merchandising-mix line between lifestyle centers and power centers. The same customer that goes into a Lululemon goes into a T.J. Maxx or Five Below, he said, so there’s more opportunity for value retailers to locate in lifestyle centers.