Key Highlights

  • Rent growth in retail real estate has stalled, but Demand remains robust—particularly in prime locations, says Lea Clay Park of Axiom Retail.
  • Shuttered drugstores are being repurposed into mixed-use retail hubs, driven by adaptive reuse strategies in high-footfall urban markets.
  • Axiom Retail’s founder warns that climate-driven cost pressures—like rising food prices—will reshape tenant Economics over the next decade.
  • Tenant demand for space in stabilized markets outstrips Supply, yet landlords face pressure to moderate rent hikes amid economic uncertainty.
  • The repurposing trend signals a structural shift in retail real estate, favoring operators with flexible leasing models and urban logistics networks.

The Great Rent Stagnation: Why Retail Landlords Are Cautiously Optimistic

Retail rent growth has lost its upward momentum—at least for now. According to Lea Clay Park, founder and chief executive of Axiom Retail, the market has entered a phase of “flattening rents,” where annual increases hover near zero in many submarkets. Yet beneath this tepid headline lies a more nuanced reality: prime locations—especially in dense urban cores—continue to command premium rents, while secondary and tertiary markets struggle with vacancy-induced pricing power. “The top end is still strong,” Park observes, “but the middle and lower tiers are where the real compression is happening.” This bifurcation reflects broader macroeconomic headwinds: stubborn Inflation in services and labor costs have eroded consumer purchasing power, curbing retailers’ willingness to absorb higher occupancy expenses.

The flattening trend is not uniform across asset classes. Drugstores—once the anchor tenants of suburban retail corridors—have borne the brunt of closures, with chains like CVS and Walgreens shuttering hundreds of underperforming locations. Yet where drugstores once stood idle, Axiom Retail and peers are deploying a strategy of “strategic repurposing.” By subdividing spaces into smaller, high-turnover formats—think grocers, health clinics, or even fulfillment hubs for E-commerce returns—developers are recalibrating supply to meet evolving demand. This adaptive reuse is not merely opportunistic; it is a hedge against the structural decline of traditional retail footprints.

Drugstore Deserts: The Opportunity in Distressed Real Estate

The wave of drugstore closures—accelerated by post-Pandemic consumer behavior and rising operational costs—has created a geographic imbalance. Axiom Retail’s data suggests that over 1,200 drugstores have closed in the U.S. since 2023, with concentrations in the Midwest and Rust Belt. Yet these vacancies are increasingly being viewed as “blank canvases” for mixed-use development. Park points to New York City’s Liberty Brooklyn—a mixed-income, transit-oriented project—as a case study: Marshalls, the discount retailer, recently signed a 31,000-square-foot Lease to occupy a former Duane Reade space, signaling confidence in repurposed urban retail.

The economics of repurposing hinge on two variables: location and tenant mix. In walkable urban districts, landlords can command higher rents by attracting experiential retailers, medical services, or last-mile logistics providers. In contrast, suburban drugstore shells—often located in strip malls with limited foot traffic—require subsidies or tax incentives to lure tenants. “You can’t just slap a café in there and expect it to work,” Park notes. “It’s about understanding the trade area’s demographics and the evolving role of the store in the community.” This calculus has given rise to a new breed of retail real estate operators, who blend traditional leasing with flexible zoning and co-tenancy strategies.

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Climate Change and the Strawberry Paradox

Park’s comment about “$8 strawberries” is more than a wry observation—it is a warning. Rising temperatures, supply-chain disruptions, and increased insurance costs are conspiring to inflate operational expenses for retailers and landlords alike. “If you’re worried about $8 strawberries,” she quips, “you ain’t seen nothing yet.” The implication is clear: climate risk is no longer a distant concern but a near-term financial pressure point. For retail real estate, this translates into higher tenant improvement allowances, elevated insurance premiums, and potential Capital expenditures for climate-resilient infrastructure.

The sector’s response has been slow but deliberate. Landlords in flood-prone regions are retrofitting basements to serve as emergency storage, while others are investing in solar arrays to offset energy costs. Yet these measures are unevenly distributed. Smaller operators, lacking access to capital, are more exposed to climate Volatility—a dynamic that could accelerate consolidation in the industry. Park’s warning underscores a broader truth: as climate risks crystallize, retail real estate will bifurcate into “climate-proof” Assets—those with resilient infrastructure and strong tenant covenants—and “stranded” properties, where value erosion is accelerated by physical hazards.

Investor Sentiment: A Glass Half Full

Despite the headwinds, investor sentiment in retail real estate remains cautiously constructive. According to Commercial Observer, Axiom Retail’s recent transactions in high-barrier-to-entry markets have attracted institutional capital, including pension funds and Private Equity groups seeking stable, albeit modest, cash flows. The flattening of rents, while disappointing for landlords accustomed to double-digit growth, is seen as a necessary reset after years of unsustainable increases. “It’s better to have a market that’s stable than one that’s frothy,” argues Park. “Froth leads to corrections.”

Yet the market’s resilience is not without limits. The Federal Reserve’s prolonged higher-for-longer Interest Rate policy has tightened financing conditions, particularly for speculative developments. REITs specializing in retail have underperformed broader real estate indices in 2024, reflecting skepticism about near-term rent growth. However, Park notes that Axiom Retail’s focus on “value-add” repurposing—where capital is deployed into existing assets rather than greenfield projects—has shielded it from the worst of the downturn. “We’re not betting on a boom,” she says. “We’re betting on necessity.”

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The Urban Advantage: Why Cities Will Win

The repurposing wave is disproportionately benefiting urban markets, where demand for mixed-use space outstrips supply. Cities like New York, Chicago, and Los Angeles are seeing a surge in “retail-as-a-service” models, where landlords curate tenant mixes to maximize foot traffic and dwell time. This trend is being amplified by demographic shifts: millennials and Gen Z consumers, who prioritize convenience and experience over ownership, are driving demand for smaller-footprint retail in walkable neighborhoods.

Axiom Retail’s Liberty Brooklyn project exemplifies this dynamic. By integrating a discount retailer like Marshalls with wellness studios, food halls, and co-working spaces, the development creates a self-sustaining ecosystem that mitigates the risk of any single tenant’s failure. Park argues that this model—where retail is just one component of a larger mixed-use tapestry—is the future of the industry. “The standalone store is a relic,” she asserts. “What works today is a destination where people linger, work, and consume.”

Regulatory and Zoning Hurdles: The Unseen Friction

Notwithstanding the opportunities, developers face a labyrinth of regulatory and zoning barriers. In many municipalities, converting a drugstore into a medical clinic or fulfillment center requires rezoning, which can take years to navigate. Park cites the example of a proposed conversion in Philadelphia, where local opposition stalled a project for 18 months, ultimately increasing costs by 20%. “The biggest risk isn’t the market,” she says. “It’s the bureaucracy.”

The regulatory landscape is particularly punitive for adaptive reuse projects in historic districts, where preservationists often resist changes to building facades or layouts. To mitigate these risks, Axiom Retail has developed relationships with municipal planning departments, pre-emptively engaging with communities to address concerns. Park emphasizes that success in repurposing hinges as much on political acumen as it does on financial engineering. “You can have the best deal in the world,” she notes, “but if the city council says no, it’s worthless.”