Retail's store-opening boom is a landlord's trade now

Retail's expansion is a landlord's trade before it is a retailer's growth story. Through Aug. 28, U.S. retailers had opened a net 127 stores this year, a swing worth 28.6 million square feet of newly occupied space, according to Coresight figures reported by Bisnow, after the same measurement a year earlier ran 1,954 net closures in the other direction. JLL put second-quarter net absorption at 10.2 million square feet against a roughly equal negative figure a year prior, and with construction effectively stopped, the distance between those two facts is where the money in retail now sits.

The gap is arithmetic. CBRE put second-quarter completions at a record-low 5.2 million square feet, with total construction volume roughly 40% below its 2016 level, while average retail rent has climbed 19% since the second quarter of 2020 to just under $25 a square foot and common building materials—cement, lumber, sheet metal among them—run 30% to 60% above February 2020 levels, per the Associated General Contractors of America. A 19% rent increase against input costs up 30% to 60% is not a gap that closes by waiting, and with vacancy at about 4.4%, a retailer that needs space this year has no slack.

The compounding is the point: run rent growth forward at the roughly 3% annual pace of the last six years, by our reading of those two numbers, and closing a 30% gap in input costs takes about nine years, while the 60% end of the range runs past fifteen. That assumes materials stand still, which nothing in the cost data suggests.

James Cook, JLL's senior director of Americas retail research, describes the escalation as a frog in a pot that keeps getting warmer, gradual until it isn't. "Costs are getting higher and higher every year," he said, calling it a continuation of a multiyear trend rather than a shock, and the practical result is that expansion is tougher than ever and the pressure lands on retailers' real estate departments.

None of this is a demand problem, which is what makes it unusual for retail after a decade of e-commerce narratives and a pandemic; the sector enters this expansion at what Bisnow calls historically low vacancy. The categories doing the expanding are the ones with balance sheets strong enough to sign: grocers and discounters remain the standbys, with Whole Foods, Aldi, Ross Dress for Less and TJ Maxx all adding stores, while specialty retailers like Fabletics and Warby Parker are in the queue and bookstores have reversed years of contraction with 422 new independent shops alongside expansion from Barnes & Noble. Low vacancy and rising rents would normally summon supply, but this cycle the cost side will not let it answer.

Costs are not going to fall by themselves. JLL research manager Andrew Volz points to data centers consuming materials and construction labor in an unprecedented development spree, which puts retail at the back of a queue it does not control; this publication has argued that the data-center pull is what sets the clearing price for industrial land and supply-chain-linked assets, and that same force is now setting the cost of a grocery shell, with retail on the paying end.

Set the second quarter's two headline figures side by side and the squeeze is legible: 10.2 million square feet absorbed against 5.2 million delivered, from two different research houses, so read the comparison as directional. When occupied space grows roughly twice as fast as space gets built, the residual accrues to rent, and to whoever owns the standing inventory.

The construction deals that do get financed tell you what the market believes. Madison Realty's $77 million construction loan for a Whole Foods-anchored project outside Dallas leans on a grocery lease and 37 saleable lots, which is the least speculative form construction credit takes right now, priced off a covenant rather than a rent forecast, while Kimco's $154.1 million retail portfolio financing cleared through private credit with lenders underwriting the tenant roster as much as the real estate. The same logic applies to stabilized grocery-anchored assets, and finished, leased space prices at a different order of magnitude altogether: the Doral Whole Foods-anchored center that traded this summer went at just under $1,000 a foot.

That is a coherent set of prices, and it says the gate into new supply is narrow. A developer needs an anchor with covenant, a land basis below replacement cost, and a lender comfortable with a schedule, and very few sites in the country clear all three. A 5.2 million square foot quarter is therefore not a blip to be waited out, and the correct retail exposure for allocators in this market is the income already in place—the centers trading off their tenant rosters—rather than the development pipeline the cost side keeps emptying.

Texas is one of a handful of exceptions where retail construction is pushing forward, per Bisnow, consistent with a state where land basis and population growth can still close a pro forma. Whether the exceptions multiply is the test the next two quarters run, and the third-quarter completions print against that record 5.2 million square feet is where it shows up first. Nothing in the input costs argues for a rush: the price of steel and crews is set by the data-center build, not by the retail leasing market, and the retailers now signing leases cannot wait for it to come down. The landlord is the buyer of this cycle, because the space already stands, vacancy is 4.4%, and the tenants who need it are bidding for the small amount that turns over.