The Power Center Opportunity: Old Habits Die Hard

By: Kenton McKeehan and Mike Jordan

What a difference a decade makes! In the years following the Great Financial Crisis, it seemed just as the economy recovered, consumers were adopting e-commerce at an increasingly faster pace as Amazon and Walmart were in fierce competition to acquire market share by subsidizing ever faster delivery times. At one point, Amazon floated an idea that they would send you stuff you wanted before you even knew you wanted it! This led to a wave of retail bankruptcies that saw iconic brands such as Toys R Us, Sports Authority, Kmart, and Payless Shoes disappear from American shopping centers.

For real estate investors, this meant significant dollars were fleeing power centers to the relative safety of grocery-anchored shopping centers. But it’s funny how years in the wilderness can help make an asset class come out of the woods stronger and more resilient than ever before. With the rise of omnichannel fulfillment, a movement of mall-based retailers seeking better visibility and access in open-air centers, and new and growing brands capitalizing on value-oriented shopping in a time of high inflation; power centers are in the strongest position they’ve ever been since the format emerged in the 1990s.

What might have been seen as risky in 2015, now seems primed for explosive growth in 2025. Consider these facts:

• With a long list of tenants looking to open space, leasing vacant boxes is taking less time than ever. According to a Green Street study, 80% of Bed Bath & Beyond stores were re-leased in less than 12 months, while only 20% of Sports Authority boxes had found a tenant within 12 months back in 2016.
• Vacancy rates in the open air sector are at an all time low of just 4%, when removing low rated shopping centers and chronic vacancies, the true availability of space in 2025 is closer to 2%
• From 1999 to 2009, open air supply growth averaged 2.5% of additional GLA annually. Since 2010, that number has fell 200 basis points. Projected supply growth through 2029 shows an even slower pace, averaging 0.3%
• The stores that closed during the mid-10s wave of bankruptcies had a larger footprint that wasn’t ideal for modern retail. The average vacant box in 2015 was over 50,000 square feet and included hundreds of former Kmart spaces that could often be as large as 100,000 square feet. Meanwhile, retailers looking to open space were focused on rightsizing their prototype to be under 30,000 square feet. That meant significant redevelopment costs were needed to make the old boxes fit for new tenants. Looking at retailers who are closing stores in recent years, many of them offer ideally sized store footprints which will help control costs.
• In Economics 101, we all learned the basic laws of supply and demand. With demand staying steady at roughly 5,800 new stores each year, and supply dwindling to record lows, landlords are once again in the driver’s seat when it comes to lease negotiations. Most power center leases were signed 20-30 years ago at what were then considered market rents. A recent Costar study showed that the average leasing spread on ten-year leases went from 6% in 2018 to 34% in 2024. While retail leasing traditionally offered less opportunities to drive rent growth, the mark to market opportunities now rival any other asset class in the years to come.

The power center format remains relevant to today’s shopper. While digital sales growth still outpaces brick & mortar, the gap has narrowed significantly and is projected to be nearly on par by the end of the decade. Furthermore, an ever-increasing number of retailers see their stores as a competitive advantage in moving the last mile in the supply chain closer to the customer. For real estate investors, power centers will continue to offer a stable, steady income stream while focusing on tenants that rely on non-discretionary spending on services and essential goods such as food and clothing. At Big V, we continue to seek out best-in-class retail properties in high income growth-oriented markets and offer the economies of scale and retail expertise that a vertically integrated owner-operator can provide.