Retail brokers are suffering their own supply chain crunch these days, and it has nothing to do with manufacturing backlogs or port congestion. They simply can’t find enough quality space for their growing list of expanding clients.

The main culprits are tightly occupied Class A centers and the rising materials costs and high interest rates that are keeping the historical retail-construction juggernaut at bay. “This all took off post-COVID,” said Katz & Associates CEO Brian Katz. “So many tenants accelerated their growth, and it hasn’t stopped. We’ve had four years in a row of record [leasing] transactions.”

The national vacancy rate stood at a tight 4.1% in May, according to CoStar, and the 53.8 million square feet of retail absorbed last year exceeded new supply by 12.7 million square feet, according to Colliers. Thus, there’s little hope for a near-term resolution. “You will have to dig a little deeper and up your game in this environment,” Katz said. “Get busy doing things like tracking down those lease expirations and option dates because if you don’t, someone else will.”

Many leasing brokers are checking listing sites by the hour, others are rooting out distressed loans and others are convincing retail owners to right-size their operations by divvying spaces to accommodate retailers. Some are even taking tenants that traditionally lease Class A space on tours of Class B centers.

All this is happening as the average time on the market for those rare vacancies shrunk to 95 days in 2023, an 18% drop from 2022 and 24% decrease from 2021, according to Datex Property Solutions.

To shore up revenue from the slowdown, some leasing brokerages are expanding services to include property management, investment advisory, appraisal and consulting, said Amy Hall, COO of brokerage and property management firm Caton Commercial Real Estate Group. Leasing brokers also are joining developers, investors, commercial real estate attorneys and financial partners for business alliances and referrals. “These help pool resources, share risks and create opportunities for synergies that can stimulate leasing activity, even in a sluggish market,” she said.

Brokers Have to Get Creative — as in Create Deals

Brokers need to study their local markets like never before and know who the top buyers and sellers are, stressed Michael Lindman, head of sales for data and intelligence for Crexi, which aggregates commercial property data, including loans, sales, portfolio details and contact information. Investors struggling to find local opportunities are turning to Crexi to find the markets with both overt and hidden opportunities and to identify the best investment sales brokers in those markets, he said. “We just aren’t living in an environment where a broker can market a listing anymore and get a dozen quick offers,” said Lindman. “They may be coming off career years, but brokers are, by definition, people who work to arrange or negotiate a deal, and that’s incredibly true in this environment.” The implied emphasis there is on “work.”

Regional retail leasing brokerages also have become more active in mixed-use developments, said Hall, especially in transit-friendly suburban markets. “They are doubling down on their understanding of local market dynamics, demographics and consumer preferences,” she said.

And tenant representatives are showing Class B and C properties to clients who previously have gone for only Class A space. As consumption patterns changed post-COVID, premium centers with the highest foot traffic got very selective about tenants, said Ron Goldstone, executive vice president at NAI Farbman, the brokerage arm of Farbman Group. In the past, Class A malls had about a 20% advantage over their B and C counterparts in attracting highly desired tenants, but that’s grown to 50% or more in 2024, he said, stating: “There are fewer and fewer options.” Competition is so fierce that retailers are starting to look at the better-located Class B or even C centers to achieve growth, he added.

To find deals for its retailer clients, his office keeps a watchful eye on vacancies in the best locations. “This includes driving through the markets that clients are targeting for expansion and tracking CoStar by the hour,” he said. “And if we see something pop up, we contact the client immediately.”

Investors and their brokers are digging deep to find distressed property owners with lopsided loans coming due, then approaching them about selling in hopes of bringing new retail to market, Lindman said. “Given the current state of interest rates, a lot of owners with short-term debt coming due are going to be faced with a tough choice: refinance at a higher interest rate and double or triple your interest expense, or sell.” That means property owners could be convinced to become property sellers.

Avison Young also is eyeing distressed property debt, said James Nelson, principal and head of New York City tri-state investment sales for the company’s capital markets group. Based on the lender profile and origination date in a commercial mortgage-backed securities loan, the firm can determine if it’s five- or 10-year note and thus know on which properties debt is coming due. “This is what’s driving a lot of [building] sales,” he said.

Avison Young, for its part, also “is considering new approaches and out-of-the-box opportunities,” Nelson said, sometimes in places building buyers don’t normally look. His office recently sold a building for a client after listing it on Zillow listing. The buyer was seeking a penthouse but decided instead to buy the entire building. Though the Zillow approach was a one-off — “Avison Young won’t be looking to Zillow to expand its investment business,” Nelson laughed — the creativity to create deals is what’s needed now. Avison Young, for example, also is reaching out directly to end users and their brokers for recent Manhattan listings like 606 Broadway and Tribeca’s 56 N. Moore, which Nelson said offer strong branding opportunities. In New York City, retail property demand “is certainly picking up,” especially on high streets, said Nelson.

Nelson said tenant rep brokers should suggest that their clients buy their spaces if possible instead of leasing, especially if the structure will be delivered vacant. Investors tend to shy away from vacant retail buildings because they’re hard to finance, “but this could work perfectly for end users,” Nelson said.

Super High Demand, Though Tenant Troubles Could Loosen Up Some Supply

In Marcus & Millichap’s June 13 Retail Trends webcast, director of national research and advisory services John Chang said: “Tenants are lining up to get into high-quality locations. If they can find them, then they’re going to pay a premium.” Even the three major U.S. markets with the lowest retail occupancy — San Francisco, Sacramento and the Inland Empire — are at 6.9% vacancy, “which is still so much better than what we saw in the pandemic,” he said.

“Demand is unlike anything I’ve seen in my career,” TownCentre Capital founder and principal Don Tepman, known on social media as StripMallGuy, said during the webcast. “Tenants are looking for space all over the place.” Last Mile American Properties Co. co-founder and chief investment officer David Birdsall concurred. “I’ve never seen this in my 33 years in the business. We’re seeing renewals at higher rents and spreads that are overachieving projections, plus a lack of new construction.”

Based on discussions with dozens of listing brokers, Katz said most high-growth chains have managed to meet most store-opening objectives in this environment, though he suspects that’s changing.

For Jersey Mike’s Subs, it definitely is. “This has definitely been a challenge, particularly on the West Coast,” said Jersey Mike’s Franchise Systems Western region real estate director Natalie Pebbles. “Deals are incredibly hard to source with today’s extremely low vacancy rates, and once sourced, deals take longer to get to the finish line and to get open. There’s much more strategy, creativity and flexibility involved in sourcing and making deals.” That includes leveraging existing landlord relationships extra hard, she added.

Demand for retail pad sites has grown significantly in the past year, driven by fast-food and quick-service restaurants with drive-thrus and by inline retailers seeking to relocate, mostly around grocery stores and big-box stores, said Marcus & Millichap webcast panelists. Other categories heating up again are mattress, housewares, flooring, paint and hardware stores, they said.

Recent restaurant closures like Applebee’s, Boston Market and Red Lobster have created some pad site availability. “There are six to seven candidates [on average] each vying to backfill those Red Lobsters,” Katz said.

New-store openings in the food-and-beverage sector have been brisk, accounting for nearly 20% of all leasing activity this year through May, or 2,400 units, according to JLL. Quick-service eateries Chipotle, Wingstop, McDonald’s and Dutch Bros. Coffee have been among the most active, JLL reported.

Rising financial pressures could spur some tenant failures. Among them. Renewal rents shot up 8.8% in 2023, according to Datex, and occupancy costs rose 6% in 2022 followed by 7.43% in 2023, which was a five-year-high increase. Chang said mom and pop shops’ annual income has dropped in the inflationary environment from $180,000 to $140,000.

Tenants Are Taking Smaller and Hard-to-Lease Spaces

Goldstone said fitness firms and pickleball clubs are filling some of the previously hard-to-lease spaces in centers, including some corner Ls. He’s also inked leases for two different curling clubs in Michigan. Lease candidates include Pure Fitness, which plans to roll out as many as 300 locations of 12,000 to 15,000 square feet in 10 states over five years. As for wildly popular pickleball, 125 courts are being added nationwide monthly, according to 2023 data from USA Pickleball. Current demand, meanwhile, could fill nearly 25,000 additional courts immediately, according to an August 2023 estimate by the Sports & Fitness Industry Association.

Retailers are shrinking their prototypical footprints to fit into the spaces that are available, which are smaller, and to save overhead, Goldstone said. Burlington, for example, has shrunk its 80,000-square-foot box to about 20,000 square feet, and CVS is doing deals between 4,000 and 6,000 square feet, compared with its typical 14,000-square-foot boxes, many of which it is closing, Goldstone said. “In today’s competitive environment, a tighter floor plan and greater sales per square foot is king.”

Urban-core retail spaces are more widely available, but their daytime populations continue to be a fraction of pre-pandemic numbers, said Hall. “This has reshaped the landscape for the regional brokerage firms and prompted them to adapt and innovate.”

It's imperative that brokers jump into action immediately these days, said Glen Kunofsky, founder and CEO of New York commercial brokerage NNN Pro Group. He told The Real Deal that attendees at the 2024 ICSC LAS VEGAS event seemed “a little bit more motivated” this year in search of deals. “People that are serious about being in the market want those interactions in real time.”