In a historic shift that could redefine the retail property landscape, service-based tenants are on track to lease more store space in 2025 than their goods-selling counterparts. This landmark moment is a testament to the retail sector’s remarkable adaptability in the face of evolving consumer preferences and economic realities.
The retail industry has experienced a renaissance in space demand over the past few years, driven by both the recovery from pandemic-induced disruptions and a fundamental recalibration of supply and demand. This resurgence has allowed retail landlords and tenants alike to fine-tune their strategies, ensuring the efficient use of space while catering to modern consumer behaviors. At the heart of this transformation is the rise of service-based tenants, whose growing footprint underscores a broader shift in consumer spending priorities.
A Shift Decades in the Making
Service-based industries such as food and beverage, healthcare, personal care, and fitness have quietly but steadily grown their presence in retail real estate over the past two decades. This trend reflects the broader economic reality: consumers are increasingly directing their disposable income toward experiences and services rather than goods. The result has been a steady contraction in the footprint of traditional goods-based retailers, particularly department stores, which have downsized in response to the rise of e-commerce and shifting shopping habits.
Yet, this transition has not been linear. During the COVID-19 pandemic, homebound consumers redirected their spending toward goods, driving temporary growth for retailers offering household items, electronics, and other tangible products. However, as restrictions lifted and life normalized, service spending rebounded, reigniting demand for retail spaces among service-oriented tenants. By late 2024, service tenants accounted for a greater share of newly leased retail space than at any time since 2019. Analysts predict that this momentum will culminate in service tenants surpassing goods-based retailers in total leased space in 2025.
The Drivers Behind the Surge
Several key sectors have fueled the rise of service-based tenants, each reflecting broader societal trends and consumer priorities:
1. Food Services
The food and beverage industry has led the charge in retail leasing, with restaurants, cafés, and specialty food retailers aggressively expanding their presence. In the first 11 months of 2024 alone, food service tenants accounted for over 21% of all leasing activity. This growth is driven by consumers’ appetite for dining and social experiences, which have become central to modern retail environments. The proliferation of fast-casual dining options, experiential restaurants, and specialty food markets highlights this trend.
2. Fitness and Wellness
Health and fitness tenants have capitalized on retail vacancies to meet growing demand in the post-pandemic era. Gyms, boutique fitness studios, and wellness centers now represent 12% of all leasing activity year-to-date. As consumers prioritize health and wellness, these tenants have transformed retail spaces into hubs for physical activity and self-care. From high-tech fitness centers to intimate yoga studios, the fitness industry has proven its ability to adapt and thrive within the retail ecosystem.
3. Healthcare and Education
Clinics, urgent care centers, and other healthcare providers have increasingly moved into retail spaces to offer convenient, accessible services. With an aging population and a heightened focus on health and wellness, this sector’s demand for retail space is expected to grow further. In 2024, healthcare and education tenants accounted for over 6% of leasing activity, a historically high share that underscores the sector’s importance in the retail landscape.
Redefining Retail Spaces
The rise of service-based tenants reflects a fundamental reimagining of what retail spaces can be. Once dominated by traditional shopping, retail environments are now evolving into destinations for experiences, essential services, and community engagement. This shift presents both opportunities and challenges for landlords.
On the one hand, service tenants often require significant modifications to retail spaces to accommodate their unique needs, from installing commercial kitchens to building medical exam rooms. On the other hand, these tenants tend to sign longer leases and generate steady foot traffic, making them valuable additions to any retail portfolio. The rewards can be substantial for landlords willing to invest in adaptive reuse and flexible design.
Opportunities for Landlords and Investors
For landlords, the growing prominence of service tenants offers a chance to diversify tenant mixes and create vibrant, multifaceted retail environments. Property owners can attract a broader demographic of consumers by catering to service-based industries, from health-conscious millennials to aging baby boomers seeking convenient healthcare options.
Investors, too, stand to benefit from this shift. Properties with a high concentration of service tenants are likely to enjoy greater stability and resilience, even in challenging economic conditions. The predictability of service tenants’ revenue streams, combined with their ability to drive foot traffic, makes them an attractive prospect for long-term investment.
Challenges on the Horizon
Despite the opportunities, the rise of service-based tenants is not without challenges. Landlords must navigate the complexities of adapting spaces to meet the needs of diverse tenants. Additionally, the success of service tenants often hinges on broader economic factors, such as consumer confidence and disposable income levels. As such, the retail sector’s continued evolution will require a careful balance of innovation and pragmatism.
Looking Ahead
As we approach 2025, the tipping point for service-based tenants’ dominance in retail real estate feels inevitable. This historic shift marks a new chapter for the retail sector, one defined by experiences, convenience, and community. For landlords, investors, and tenants alike, the challenge will be to embrace this transformation while staying attuned to the ever-changing preferences of consumers.
In the words of one industry expert, “Retail has always been about more than just shopping. It’s about meeting people where they are and giving them what they need—whether that’s a great meal, a workout, or a doctor’s visit. The future of retail is about service, and that future is now.”
Comments