5Qs for CoStar’s Brandon Svec on the paucity of good retail real estate

Brandon Svec was the VP of research and fund development at one of the nation’s most active acquirers of retail real estate—Inland Real Estate Group—before moving to CoStar as its national director of retail analytics. His recent report on historically low levels of retail space availability led us to call him for more details.

CoStar’s latest retail real estate report says that the average size of a new retail lease hit its lowest level since the company started tracking it in 2007.

Yes, the average lease size in the first 10 months of 2023 was 3,256 square feet. To put that figure in perspective, the prior 10-year average size lease was 3,500 square feet. Prior to the Great Financial Crisis, it was more than 4,500 square feet. This is not a demand-side story, but supply-side. We broke ground on less retail space in the third quarter since we started tracking the industry in the early 2000s. But we think you’d have to go back to the Nineties to find a number this low.

What are some of the spaces hardest to find?

There’s an historic lack of 10,000-sq.-ft. spaces across the country. Five Below has been one company that’s been very active at tying up those spaces. And when you are looking for that junior anchor or mid-sized box space, there’s nothing out there. Smaller boxes, too, are dealing with a lack of good supply. Everything has been filled. The situation flies in the face of what non-retail people think about physical retail. There’s not a lot of available space out there. 

When do you think the situation might turn around?

Construction costs are at an all-time high, and it looks like it’s going to get worse before it gets better. We are going to remain in a very slow building environment for some time to come. Until we get lower land and labor costs, there’s no sign of an uptick in supply. We could be waiting until 2025.

Yet hot retail categories, such as value-priced chains, remain on aggressive expansion plans.

Yes. There’s no more bullish case for retail rent growth. If I as a developer can get the higher rent, I will make it happen. The higher rent allows for the higher construction cost. 

What about Class B malls with high vacancy rates, many of which are being plowed under and turned into mixed-use projects?

Class B malls can drop rents, but lenders won’t let them do it under current loans. To do it, these properties are going to have to trade out to an opportunistic buyer willing to renovate the property.