Oversaturated Retail Markets: What and Where to Go Next

For decades, the rhetoric around national retail real estate vacancies has been around the “retail apocalypse” conversation, how over-retailed we are as a country and what to do with all the empty spaces. Many professionals in the industry never thought they would see the day that 98 percent of shopping center retail spaces listed in 2023 were leased within nine months, as noted by CoStar’s recent report.

If you’re a retailer, it can feel like you're stuck as you look out at the current landscape of high demand and competition for less available space. There are a few ways to look at this situation and open successful stores, dependent on a retailer’s objectives and category.

• New DTCs and startup brands: Most retailers these days are looking at their data and taking the time to understand who their customer is, step one.  The data can be surprising and lend to better understanding the characteristics of your customer and why the customer shops the brand — this assumes a brand starts online and can combine both qualitative and quantitative data. Retailers will also want to run an exercise on a unified commerce P&L (yes, look beyond the four-wall P&L). To get the best results from a first brick-and-mortar store, open it in one of your top three markets. If not, be prepared to do more marketing and for a slower ramp period as you build brand awareness in a market. Other impacts could be slower online sales vs. a boost as well as the speed and number of new customer acquisitions. Some other choices to consider are:
  • Wait for the right market to open. This may also work in a retailer’s favor as far as paying rent at the height of demand, but now most rents escalate by 3 percent annually. Monitor the market for retailers with lease expirations or retailers that are underperforming.
  • Consider if there's a space for sublease or assignment.
  • Look at markets outside of your top three and assess what this will mean for your bottom line, but also consider the learnings and fine-tuning of the brick-and-mortar model.
• Mature, high-growth brands: Retailers in this category have the financial stability to skip what would be the next market in their retail strategy and real estate road map and go to the next market. If a retailer is beyond its top 10 markets at this point, it may consider high performing markets that can support a second or third store. Data can assess cannibalization and what shifts these stores could potentially have, both positively and negatively across channels and the financial impacts to the company vs. going into new markets.
• Traditional retailers: Like the category above, retailers may be assessing the same growth trajectories and possibly considering expiring leases, terminations, renewals and what it means to be in a market that has little vacancy. What's the impact of a store at top-of-the-market rents and annual increases and does it warrant being in the market from a P&L perspective?
• Luxury retailers: While some luxury retailers are underperforming, many are still expanding. The term “emerging luxury markets” looks at some of the choices luxury retailers are making; for instance, Hermes going to Austin, Texas and Williamsburg, Brooklyn. Luxury brands are monitoring wealth and affluence migration patterns out of large cities like New York City and Los Angles, with growth in markets such as Austin, Scottsdale and West Palm Beach. Other implications are rising interest rates and the impact on the aspirational consumer, political uncertainty in an election year, and investment concerns and the impact of COVID relief drying up as student loan payments commence.

Some good news: there are markets, depending on category, that are not saturated; consider Boston, Chicago, and Salt Lake City, to name a few.

When will market saturation start to dissipate? It’s hard to say. Despite some of the challenges that are facing brands that want to open physical stores, there are certainly opportunities out there for those brands that have clear objectives and use data-driven insights to make the right decisions for their specific brand and situation.

Rebecca Fitts is senior vice president, business strategy at Alvarez & Marsal Property Solutions, a full-service, commercial real estate advisory firm based in New York City.