Back in Business: Shopping Centers Drive CRE Recovery

Current Shopping Center Performance

In recent years, construction of new retail centers has slowed considerably, with developers focusing more on industrial, mixed-use projects, and residential developments due to cost impediments and a changing real estate landscape. Rising construction and borrowing costs, especially with high interest rates, have further restrained new retail projects, leading to a constrained supply of shopping centers. This has left many markets with a limited selection of retail spaces, particularly in high-demand areas where population growth has heightened demand for retail services.

Despite the rise in e-commerce, many retailers still see value in maintaining a physical presence—especially in grocery-anchored centers and other high-traffic spaces. These locations are particularly appealing to businesses like healthcare providers, quick service restaurants, and specialty retail shops, all of which benefit from foot traffic generated by nearby essential services. This demand has intensified competition for available spaces, allowing landlords to increase rental rates.

Tenants have also begun to favor smaller spaces, which led to increased demand for strip centers in particular. As of Q4 2024, vacancy for shopping centers across the U.S. reached 6.6%, with -0.5% inventory absorption, according to CoStar. The low supply of shopping centers, coupled with sustained demand, has also driven rental rates higher. Market asking rent for a shopping center increased to $24.76 per square foot as of Q4 2024, and this trend is likely to continue if retail development doesn’t pick up. As a result, well-positioned retail properties are increasingly valuable, and tenants in competitive markets are likely to face elevated rental costs for the foreseeable future.

Performance of Grocery-Anchored Centers Remains Strong

Grocery-anchored properties have continuously demonstrated strong resilience, even through economic downturns and the rise of e-commerce. Their consistency has made them a secure investment in a market where stability is highly valued. Specifically, grocery-anchored centers remain an enticing investment opportunity as they are often priced 100 or more basis points above single-tenant net lease deals.

Grocery-anchored centers proved their strength by recording rent growth of 3.4% for the 12 months ending in July 2024, which is greater than the U.S. retail average. Some grocery tenants leading the way are Aldi and Grocery Outlet Bargain Market. Visits to these grocers have increased by 26.3% and 14.3%, respectively. Aldi, in particular, is one grocer that stands out as a strong anchor tenant, due to its popularity among consumers for its range of affordable products. The grocer boasts over 2,400 stores, and attracted 466 million visits nationally from April to September 2024.

With significant capital on the sidelines, many investors are actively seeking properties that combine resilience with growth potential. Grocery-anchored centers often come with long-term leases, providing a stable income stream that appeals to both institutional and private investors looking for reliable returns. Given these factors, grocery-anchored centers are likely to remain a cornerstone of the retail real estate market, attracting investors focused on stable, long-term performance in a dynamic economy.

Outlook for Shopping Centers in 2025 and Beyond

Retail property sector investments are healthier than media and mainstream headlines imply. Volume is moving in an upward trajectory, with the amount of capital to invest in shopping centers continuing to pile up. In 2025, the anticipated stabilization of interest rates could further increase demand for retail assets, as financing becomes more feasible.

Operationally, rising costs from prior years have spurred a re-evaluation of tenant mixes, with a focus on essential and experiential tenants that drive consistent traffic and complement traditional retail offerings. The limited development of new shopping centers, combined with strong tenant demand for existing high-quality properties, points to a favorable investment environment for shopping centers and their cap rates over the next few years. With low vacancy rates in desirable centers—particularly those anchored by essential services like grocery stores—net operating incomes (NOI) are expected to remain strong. This stability appeals to investors looking for assets with consistent cash flows, supporting lower cap rates and higher valuations.

Shopping Center Developments Will Rise

Together with retail spending, retail construction is expected to begin increasing during the second half of 2025. Most developments will continue following the population growth occurring in the Sunbelt to keep up with the region’s demand for new space. Atlanta is one specific market investors have begun to target in order to boost shopping center performance.

Regency Centers, a REIT that focuses on operating grocery-anchored centers, is contributing to the continued success of shopping centers in Atlanta. The firm recently expanded into the market with a portfolio that will meet consumer demand by modernizing its current tenants. Specifically, the REIT set its sights on Cambridge Square in the Brookhaven submarket. Regency focused on upgrading the center’s anchor tenant, Publix, to make the property larger for an enhanced customer experience. The shopping center will also see increased efforts from Regency to make it more accessible, including new bicycle parking.

Experiential Tenants Aid Shopping Center Success

To attract and retain more consumers, shopping center owners have begun adding experiential tenants to their tenant mix. Adding these kinds of tenants allows for shopping centers to stand out to a diverse demographic of consumers with various needs. Experiential tenants also represent a standout investment, making up half of all new leases over 2024.

One experiential tenant that has grown in recent years is family-friendly Sky Zone. The popular trampoline park provides entertainment for families across the country, and operates 231 locations as of Q4 2024. It leased 25,386 square feet in 2023, and has eight expansions planned for New York and Chicago in 2025.

Overall, Sky Zone locations excel at transforming commercial spaces that are underutilized and difficult to lease by creating a dynamic activity center that renders a different use case than traditional retail.

Technology Advancements Improve the Future of Shopping Centers

Omnichannel retail, which integrates online and physical shopping, has become standard for many retailers. It is common to see tenants offer pickup services where customers can shop online for their goods, and then make a stop in person to pick up their products. The implementation of these contactless systems allows for a seamless shopping experience for consumers.

Along with providing online access for customers, the increased use of technology and AI also benefits retailers in transforming their management strategies. Data tracking through AI or other systems allows retailers to view foot traffic, spending patterns, and tenant performance. These insights support optimized space usage, tenant adjustments, and revenue diversification. Having access to this data also shows retailers how they can best ensure customer satisfaction. Overall, retail centers that prioritize adaptability, technology, and strategic tenant choices are best positioned to thrive amid economic and consumer changes.

Experimenting with New Looks

Consumers can look forward to a new kind of shopping center to enhance their shopping experience. SITE Centers, a REIT that specializes in shopping centers, has been investing in many properties across the country to mold to a new retail model. Throughout 2024, it closed $1 billion in shopping center sales. To further increase its success, the firm launched its spinoff company, Curbline Properties, on October 1, 2024.

The new spinoff will focus on creating convenience properties—a new kind of shopping center. These convenience centers are retail locations without a big-box or grocery tenant to provide the role of an anchor. The properties attract consumers with a mix of national tenants and the convenience of visibility, which increases occupancy. Convenience centers are attractive to investors as about $8 billion of these facilities trade annually, according to Curbline, creating an investment opportunity for these properties that are in top submarkets across the U.S.

Overall, shopping centers are on a stable pace to recovery. Despite the lack of space, shopping center owners can utilize their tenant mix to ensure that their property remains stable. Using technology to analyze consumer trends will also aid retailers moving forward as they can adapt their business model to meet consumers’ needs.