Key Points:
A number of major retailers have announced plans for store closures in 2025. At first glance, that may seem concerning for landlords, as store closures suggest higher vacancy rates and lower rent growth. However, several offsetting factors suggest a limited impact on retail commercial real estate (CRE) in the near term. These factors include a structurally undersupplied retail CRE market, demand from retailers waiting for vacated space, and the prospect of replacing struggling tenants with more financially stable ones that can pay higher rents.
“Given the limited supply and high demand for retail space, it seems unlikely that retail rents will be substantially impacted by these store closures.”
Store Closures Alone Aren’t the Full Story
An estimated 10,000 to 15,000 retail stores are scheduled to close in 2025, accounting for approximately 140 million of square feet. Data from CoStar shows that, nationally, there are approximately 12.2 billion square feet of retail space, so 140 million square feet of newly vacant retail space would result in a 1.1 percent increase in the retail vacancy rate, from 4.2 percent to 5.2 percent. This is hardly a distressing figure given that the average retail vacancy rate was 5.6 percent in the decade that preceded the pandemic.
However, store closures alone don’t paint the full picture. Retail research firm CoreSight estimates that the number of retail store openings in 2025 will be slightly down compared to 2024, from 6,000 to 5,800. If these openings are accounted for along with closures, the net impact on the retail vacancy rate would be closer to a 0.7 percent increase in the vacancy rate.
Retail Space is Undersupplied
A substantial mitigating factor to the wave of expected store closures this year is the limited availability of retail space to begin with. After the Global Financial Crisis (GFC), retail construction starts fell dramatically. Even with a slight resurgence in construction starts mid-decade, retail construction never caught back up to pre-GFC levels. The growth in eCommerce sales during this period, which created concerns among investors about the future of brick-and-mortar retail, also contributed to keeping retail construction levels low.
Despite Closures, there is Sidelined Demand to Lease Retail Space
One consequence of this limited supply is that some retailers have had to put expansion plans on hold until better properties could be identified. When solid properties in prime locations do become available, many retailers are eager to seize the opportunity. This has driven months-to-lease for retail properties to a near-record low.
Certain types of retail locations, like restaurants and grocery stores, are opening more stores than they are closing. This suggests that demand to lease retail space is still there, but some companies may be relocating stores to align with post-pandemic, demographic-driven shifts in demand.
Other types of retail stores have fared worse. In 2024 and 2025, more net closures (closings less openings) are expected for discount stores, apparel and shoe stores, home improvement stores, home furnishing stores, auto part suppliers, and drug stores. More net closures of drug stores are expected than any other category, driven by the restructurings of CVS and Rite Aid. Discounters are in second place, with store closures announced by Family Dollar, Dollar General, and Big Lots in 2024. Despite these closures, there is still demand to lease some of the recently vacated space, as evidenced by Ollie’s Bargain Outlet taking over 40 Big Lots locations. Home furnishing stores are in third place, followed closely by home improvement stores. These categories have been impacted by a slow housing market, which has limited the demand to furnish recently purchased homes, and low levels of new construction, which has reduced demand for building materials.
Some retail landlords are even optimistic about the prospect of store closures, as it provides them with the opportunity to lease their space to more financially stable tenants at higher rental rates. Retail leases include pre-determined annual rent increases, often ranging from 2 to 5 percent per year. While this guarantees rent increases each year, the tradeoff is that market rents can often rise faster than the contractually obligated increases in the lease. This difference between what a tenant is currently paying and the current market rent a landlord could get for that space is called a “leasing spread.” For a number of closing stores, these leasing spreads could be substantial, offering potential upside to retail landlords.
Demand to Lease Retail Space Has Outpaced Closures in Most Cities
Over the last year, most cities with significant retail store closures have had an even greater number of store openings, as shown in the top portion of the following chart. Of the top 20 cities by amount of vacated retail space, only seven had closings outpace openings over the last year. Los Angeles led the country with the most vacated retail space on both a gross basis (excluding store openings) and a net basis (including store openings). The next three cities with the highest levels of vacated retail square footage were Dallas, Houston, and New York, all of which had openings outpace closings. Atlanta, in fifth place, had more retail closures than openings, as did Detroit, Seattle, and California’s Inland Empire (east of Los Angeles).
The bottom portion of the chart accounts for the different sizes of the cities and shows vacated and leased square footage as a percentage of a city’s inventory. This makes it easier to see the gaps between closures and openings in smaller cities. Note that the two charts are sorted by vacated space, with the top chart showing absolute terms and the bottom chart showing relative terms, so not all cities appear in both charts. Even when controlled for city size, Los Angeles had the highest level of gross and net closures, followed by its neighbor, the Inland Empire. Detroit, in sixth place, had closings significantly outpace openings relative to inventory. In the remaining four cities where closings were greater than openings, the gap was considerably smaller than in Los Angeles, the Inland Empire, and Detroit. Overall, most cities with a large number of store closures had sufficient demand to lease the vacated space.
It's not all Rosy, But there are Mitigating Factors in Retail Closures
In most places and across several retail sectors, there seems to be sufficient demand to lease enough retail space to absorb some, if not most, of the upcoming vacant space due to retail store closures. Given the limited supply and high demand for retail space, it seems unlikely that retail rents will be substantially impacted by these store closures, especially since some landlords may benefit from positive leasing spreads.
This is not to say that the slowdown in retail spending, which we discussed in greater detail in a recent article, won’t impact retailers’ bottom line. It will – if that spending slowdown persists. However, even with a persistent decline in retail spending, some time would have to pass before demand to lease retail space, and therefore rents, were impacted. This spending slowdown would need to be entrenched enough to disrupt the pent-up demand for retail space by making retailers doubt whether investment in new locations would be profitable. Moreover, whatever impact a slowdown in spending ultimately has will be somewhat limited because the lack of available retail space will put a floor on how far retail rents might decline, if they decline at all.