Retail's Supply Squeeze: A Resilient Consumer Meets a Shortage of Well-Positioned Space

Retail sales in the United States have more than doubled since the global financial crisis. Over that same stretch, the industry added very little net new retail space. That gap between what consumers spend and what landlords can offer is the defining feature of retail real estate today, and it holds up despite headlines about gas prices, tariffs, inflation, and global conflict.

To understand how retailers and shoppers are holding up heading into the most important retail quarter of the year, I recently welcomed Tom McGee, President and CEO of ICSC, to America’s Commercial Real Estate Show. Tom has led ICSC since 2015, after 26 years at Deloitte.

For owners and investors, the conversation points to a sector with durable demand, constrained supply, and a consumer base that is strong overall but increasingly split by income.

Jobs Keep the Consumer Spending

Tom’s read on the consumer starts with employment. Unemployment ticked up slightly in the latest reading, but it remains at historically low levels. Historically, when people have a job and feel confident in it, they keep spending, and that pattern has held through a period when inflation has been top of mind for shoppers at every income level.

The wealth effect adds to it. A strong stock market and confidence in home values encourage spending. Tom noted that higher interest and mortgage rates could slow home sales and the churn that comes with them, which would weigh on categories tied to moving and home improvement.

The Holiday Forecast and a Two-Speed Consumer

ICSC defines the holiday season as the full fourth quarter, October through December, and the numbers are solid.

• Total Retail Sales: ICSC expects $1.7 trillion in fourth quarter retail sales, an increase of 4.3% to 4.9% over last year.
• Holiday Shopping: The average consumer is expected to spend about $650 on holiday-related items, up from last year.
• The Top 10%: The highest-earning 10% of Americans will spend roughly 5 times that $650 average, and they account for 50% of all consumer spending.
• The Other 90%: Most households continue to shop but are far more focused on price, which is why essential and discount retail are performing well.

For anyone underwriting a retail tenant, that concentration matters: a center serving price-sensitive households needs tenants built for value. My own observation on air was that an economy this dependent on spending at the top could feel it quickly if policy pushed hard against those earners.

The Supply Squeeze: Sales Have Doubled, Development Has Not

Occupancy across retail real estate is at historically high levels, and Tom was clear that the strength extends across formats, from regional malls to open-air centers to standalone retail.

We see this every day at Bull Realty. We represent retailers here in Atlanta, and finding good locations for them is hard right now. That scarcity is pushing rents higher.

The empty drugstores many of us see in our neighborhoods are a good test of the thesis. Tom described pharmacy closures as a healthcare story more than a retail story, driven by changes in how people get care. The real estate itself rarely stays vacant. Well-positioned suburban boxes get snapped up quickly, often with competition for the space. With the cost of capital, labor, and construction all elevated, Tom does not expect enough new development over the next couple of years to change the balance.

Where the Strength Is: Grocery-Anchored and Suburban Open-Air

Tom did not single out one expanding category, since expansion is brand specific. The formats, however, show a clear pattern.

• Grocery-Anchored Open-Air Centers: The hottest part of the sector. Hybrid work means people spend more weekday time near home, which drives more trips to the grocery store, restaurants, and services.
• Suburban Retail: Moving from five days in the office to three or four has, in Tom’s words, positively impacted suburban retail pretty dramatically.
• Malls: Tom pointed to the mall sector as the best performer in commercial real estate over the past year.
• Essential and Discount Retail: In a price-conscious environment, these concepts keep winning share.

Shopping in the Age of AI: Convenience Trips and Discovery Trips

ICSC recently partnered with McKinsey on a report called Shopping in the Age of AI. One finding is that shoppers now arrive at the store better researched and better informed, which raises their expectations of the store and its staff.

Tom’s framework for responding is to define the purpose of each store. A convenience-oriented store should be laid out and staffed to get a customer in and out quickly. A discovery-oriented store invites people to linger, with a layout and staff knowledge built for browsing. A single retailer can operate both types across its portfolio. Landlords have the same job at the center level: cluster convenience tenants where parking and curbside pickup work, and curate discovery tenants into a setting that rewards time spent.

Center layout drives real leasing decisions. I once worked with a large retailer that did not want Chick-fil-A on its outparcels. The reason was that Chick-fil-A is so popular the drive-through line blocks the entrance to the center.

AI Is a Tool, and Relationships Still Close Deals

We are also seeing AI show up on the other side of the table. Some prospective tenants send business plans that are clearly AI written, and they read as fluff. Others run a lease through AI as their lawyer and send back a markup that throws off the landlord, who will not accept most of it.

We recently had a client ask us to list an $11 million property. We sent our standard listing agreement, and it came back with so many changes that we nearly walked away. It turned out the markup had been generated by AI. We converted it to a normal exclusive assignment, and the owners agreed to every change. They are good people to do business with, but the AI draft made them look difficult.

Tom’s view is that commercial real estate, and retail real estate in particular, is a relationship business. AI can make processes more efficient, but it does not replace people. He goes further: as AI becomes more common in daily life, physical stores become more important, because people are social and will look for more chances to get together in person.

Final Thoughts: Start With the Consumer

Tom calls retail the ultimate consumer-facing business, for retailers and landlords alike. The fundamentals he sees lasting regardless of technology are merchandising, pricing, and above all great customer service. Retailers that do those 3 things consistently well compete effectively in any economy, and landlords that keep centers well maintained and matched to the needs of the neighborhood keep those tenants.

The outlook is positive with caveats. The consumer remains resilient, the holiday season should be strong, and the supply shortage protects occupancy and rents. The warning signs are in the gap between income groups and their tolerance for higher prices. As long as the employment market holds, Tom expects retail sales to keep doing well, and that is a solid foundation for retail real estate owners and investors.

Have a Commercial Real Estate Strategy to Discuss?

With more than $8 billion in closed commercial real estate transactions, Michael Bull, CCIM, brings extensive transaction and market expertise to owners, investors, and companies. As host of America’s Commercial Real Estate Show and an active broker with a strong presence in Atlanta and throughout the Southeast, Michael is available to discuss property strategies, market conditions, acquisitions, dispositions, and other commercial real estate opportunities.

You’re invited to contact Michael to discuss your commercial real estate objectives.

Michael Bull, CCIM
Michael@BullRealty.com
404-876-1640 x 101