Here’s why vacant downtown storefronts can be hard to lease

The Morristown Green, a historic town square in New Jersey, dates back to the Revolutionary War. Three of the streets surrounding it are bustling with bars and restaurants, but one stretch has been plagued with storefront vacancies for years.

The block, North Park Place, is lined with empty stores, including a former Rite Aid pharmacy, and as such is emblematic of central business districts across the country plastered with "For Lease" signs.

The U.S. retail market is extremely tight, with low vacancy rates and new construction scarce. Yet some storefronts — defined as a retail site having a facade, entrance or display windows facing the street — remain stubbornly unoccupied. Those vacancies persist not always because of weak demand but because many spaces no longer meet tenant needs or landlord expectations.

The topic of storefront vacancies was front and center at the ICSC retail real estate conference in Las Vegas this week. A session Monday discussed how cities and the public sector are activating empty ground-floor retail spaces.

"We've been talking about downtown retail vacancy, as a crisis for over a decade," said Davon Barbour, CEO of Downtown Austin Alliance in Austin, Texas. "Are we dealing with a real estate problem, a community problem, a planning problem, or is it all three?"

"I think it's all three," said Nina Albert, deputy mayor for planning and economic development in Washington, D.C.

Strategies to address the issue include creative leasing strategies and even pop-ups, a tack that Pittsburgh used to help fill 74 of its 89 downtown retail vacancies in advance of the NFL draft last month, according to Cate Irvin, senior economic development director for the Pittsburgh Downtown Partnership.

The casual observer may be perplexed about why a store in a busy downtown center isn't leased, but there are a variety of explanations that may not be obvious to someone who isn't a broker or a tenant.

In many cases, the problem isn’t demand but design: low ceilings, inefficient layouts and a lack of venting are rendering older storefronts functionally obsolete for a growing cadre of retail tenants, such as restaurants and fitness centers. At the same time, some landlords are narrowing the pool of occupants by holding out for top-tier tenants, pricing aggressively or declining to subdivide large spaces, brokers said, derailing negotiations and leasing.

The broker for the vacant North Park Place strip, Cushman & Wakefield Director of Retail Services Blake Shanaphy, told CoStar News he's had "a hundred-plus" offers from tenants for those sites over time. The demand is there. But the landlord is particular about whom he wants as a tenant, so the space remains empty, according to Shanaphy.

The storefronts that Shanaphy is listing on North Park Place in Morristown are owned by Dave Brown. The landlord doesn't want any franchisees or food establishments — but rather institutional-caliber, totally creditworthy tenants — for that space, which severely limits the pool of potential occupants, Shanaphy said.

From the landlords' perspective, they are trying to guard against getting a tenant that ends up not being able to pay its rent or going out of business.

The public sector in Morristown has stepped in to try to address the retail vacancy issue. In the case of a years-vacant, 132,000-square-foot Century 21 department store owned by Brown at North Park Place and Speedwell Avenue, the town of Morristown declared the parcel blighted and classified it as an area in need of redevelopment, according to local media reports. The proposed plan is for the site to be transformed into apartments, offices and ground-level retail space.

Brown has sued the town to block the redevelopment, alleging the municipality's action is illegal. His attorney, Michael Ash, didn't return a phone call from CoStar News seeking comment. And officials for Morristown didn't respond to several phone calls.

Multiple brokers told CoStar News that landlords have thwarted efforts to lease their vacant storefronts by looking to charge above-market rents and being unwilling to subdivide large spaces or foot the bill for tenant improvements. Or they are so picky about whom they want as tenants that it's near impossible to find a match.

Similar dynamics are evident in New York City. On Central Park West, brokers marketing retail space say interest is strong, but tenant demand is highly specific.

National retailers tend to favor high-traffic corridors such as nearby Broadway, while quieter residential blocks draw a narrower pool of service-oriented tenants such as pharmacies, salons and healthcare providers.

Even well-located spaces can linger if they don’t match tenant requirements or expected buildouts, according to real estate pros.

“There’s not as much visibility” on Central Park West as there is on Broadway, according to Zach Landes, a broker with Royal Properties. He's marketing two retail spaces, the former Valery Joseph Salon and a vacant pharmacy, on Central Park West between West 62nd and 63rd streets. The sites, with views of Central Park, are at the base of the luxury Century Condominiums.

“The flip side [of Central Park West versus Broadway] is this is such a tremendous local residential destination," Landes said. "There are a tremendous amount of high-net-worth individuals living in the surrounding buildings. And the area is sort of starved for local service uses.”

The pandemic and the advent of hybrid work schedules led to less foot traffic in some downtowns and retail corridors that "were built around a much larger daytime office population," said Sid Singer, vice president of leasing for Levin Management Group. That was a dark cloud over storefronts, cutting lunchtime business, but at least one retail analyst said back-to-the-office mandates have helped alleviate that particular issue.

And decades ago, the rise of enclosed malls was a blow to downtown storefront retail. But today, malls may not be viable for smaller retailers who want to stay local and within their communities and can't afford high rents, according to brokers.

So it turned out that storefronts and malls each have their own different sets of advantages for different tenants, according to retail consultant Rudy Milian.

"Storefronts, whether street-level retail or unique freestanding stores in open-air shopping centers, offer brand independence, direct access, great visibility and flexible operating hours," Milian said in an email to CoStar News. "Mall spaces provide high, consistent foot traffic, shared security, amenities and tremendous cross-shopping opportunities within a managed complex."

National chains such as Starbucks and Chipotle Mexican Grill have locations in malls as well as storefronts.

For busy consumers, being able to run in and out of a store quickly is important. That's why some chains, including Shake Shack and Chick-fil-A, are opening more drive-thrus. But in some bustling downtowns, including Morristown, there's little on-street parking available. That's a big issue — and a deal-breaker — for some tenants in terms of storefronts, various brokers told CoStar News.

"Downtowns are tricky because of the parking," Danielle Brunelli, president of RJ Brunelli & Co., said in an interview. "If the parking is not convenient, customers just tend to not to go [there]. There's only so much time in a day. If there's a busy shopping center, people would rather be able to park and then go shopping. That's why the lifestyle centers do so well."

Storefronts were once typically leased by stores selling apparel, shoes and goods. But last year, for the first time on record, service-based retailers leased more space than traditional goods-based tenants, according to CoStar data.

"The tenants most interested in storefronts today are generally the ones that really benefit from visibility, easy access and being part of the surrounding neighborhood," Singer said. "That includes restaurants, coffee shops and fast casual concepts, as well as fitness and wellness users like Pilates, yoga, boutique gyms and med spas. We’re also seeing more service-oriented businesses and experiential retailers that want a strong street presence and a local feel."

But those types of tenants have their own infrastructure requirements, more than, say, a dress shop would. For example, they may need a location with a loading dock.

"Restaurants, fitness, wellness and medical users may need different layouts, ventilation, plumbing, parking or other improvements, and older storefronts can be costly to adapt," Singer told CoStar News.

A retail space not having a loading dock will be a no-go for some potential tenants, according to several brokers.

One of the biggest challenges of leasing a storefront is trying to adapt a site to accommodate a restaurant, according to brokers. Eateries require venting to release airborne contaminants, gases and smoke from cooking. Making such infrastructure changes can not only be not only physically difficult or impossible but also pricey, various brokers said.

That's an issue that Craig Parcells, a JLL executive vice president, faced when he looked for tenants for a vacant Morristown Starbucks. The chain closed that cafe, located on an otherwise leased-up block on the Morristown Green across from North Park Place, last September. Starbucks closed dozens of locations across the United States at that time, including a number of downtown storefronts.

The closed Morristown location performed well, but Starbucks has another site in town with a drive-thru, a tack the coffee chain has been leaning into, Parcells told CoStar News. Street parking in front of the now-vacant store is scarce, and a drive-thru isn't feasible there.

Parcells considered a restaurant tenant for the property, but instead opted for "a dry use, meaning a non-restaurant use for that space," he said. That lease is being finalized.

Morris County, which includes Morristown, requires venting all the way to the roof for restaurants, and there is housing above the Starbucks space, Parcells said.

"We'd have to go out and then up [for the vent] because you can't really go through somebody's apartment," he said.