The American Store Is Shrinking

The rise in e-commerce and a growing distaste for giant emporiums are softening demand for department stores and other big-box space. Restaurants and coffee shops, meanwhile, are gobbling up small storefronts as Americans spend more time dining out, ordering at drive-throughs or using food-delivery apps.

The end result: Retailers signed leases averaging 3,200 square feet during the first three quarters of 2023, the smallest size since data firm CoStar Group began tracking this metric in 2006.

“A shopping center today looks very different than it did 10 years ago," said Brandon Svec, CoStar’s national director of U.S. retail analytics. “The focus is much more on experience, much more on food and beverage."

Food and beverage companies signed nearly one-fifth of all retail leases this year, according to CoStar, with most targeting spaces 5,000-square-feet or smaller.

Despite these changes in retail’s landscape, overall demand for store space is robust. Nationwide, the rate of available retail space was 4.8% in the third quarter, the lowest level in the 18 years the data has been tracked by real-estate-services firm CBRE.

Rather than filling sprawling department stores with an array of merchandise, many retailers have started using data from online orders, social-media and foot-traffic analytics to customize smaller inventories to the local population. They have also bolstered store infrastructure to make it easier for customers to pick up and return items bought online.

This allows them to keep fewer items in stores and shrink their footprints to fit into the open-air shopping centers where customers are increasingly shopping.

“The old days of stack ’em high and watch ’em fly are gone," said retail analyst Dana Telsey, who founded and runs Telsey Advisory Group.

Some global fashion retailers like Zara and H&M are going in the opposite direction. They are growing their store footprints, especially in London and other overseas markets. Luxury retailers in the U.S. are also signing leases for bigger space, offering more food and drink, and venturing beyond their traditional high-street addresses into new markets.

But many other companies that previously wouldn’t have compromised on square footage are now happy to squeeze into smaller spaces, said Jeff Edison, chief executive of Phillips Edison, a real-state investment trust in the grocery-anchored shopping-center sector. Retailers are trying to get closer to customers who are moving to the suburbs, working from home a few days a week and want the convenience of drive-through and curbside pickup.

“Location is a higher priority than the perfect size," he said. “That’s a fairly significant change over the last 10 years."

Phillips Edison is 98% occupied, the highest level in the company’s three-decade history, Edison said. The company also reports record-high retention rates as retailers are reluctant to let go of their leases.

As online shopping has grown, less store space is being used to sell basic retail commodities like socks and toothpaste. E-commerce now accounts for about 15% of all retail sales, up from just over 6% in 2014, according to the Commerce Department.

But companies selling in-person services and experiences such as nail salons, coffee shops and yoga studios continue to sign retail leases.

The cookie company Crumbl, which sells a rotating menu of six gourmet cookies for takeout, delivery and catering, has opened more than 900 stores across the U.S. since 2017, most smaller than 2,000 square feet. Inside are open-concept kitchens with up to six refrigerators, ovens, mixers and storage for ingredients, said Nathan Christensen, who works for the corporate office’s area development team to locate future bakery sites.

“You can see our employees cracking those eggs and mixing in the sugar and the butter and the flour," he said.

Traditional apparel and big-box retailers are also thinking small. Nordstrom and Target are among the chain stores leaning into smaller spaces as shoppers spend less time in enclosed malls.

Macy’s has also embraced the trend. It has opened a dozen small-format stores since 2020 and plans to add an additional 30 locations by the end of 2025, the company said. At 30,000 to 50,000 square feet, the stores are about one-fifth the size of Macy’s mall locations. Bloomingdale’s, a unit of Macy’s, has opened three small-format locations and plans to expand.

At the same time, Macy’s has closed 80 department stores since February 2020.

Other big-box retailers, such as Sears and Bon-Ton, have gone out of business in recent years, further depressing demand for large spaces, Svec said. Overall, more than 1,000 department stores closed across the U.S. between 2016 and 2020, according to real-estate research firm Green Street.

Landlords are subdividing or redeveloping this unused big-box space, and construction of new retail has been minimal over the last decade.

This check on supply has helped push retail vacancy to record-low levels, while rent continues to climb.

The rising cost of rent is a major reason some retailers are opting for smaller spaces. Crumbl’s locations don’t have seating, which allows them to open in shopping centers’ smaller storefronts and tempt passing customers’ sweet tooths. But most important is the cost savings.

“If we can get those rents down as low as possible by making our footprint smaller, it’s more profitable for our franchise partners," Christensen said.

Write to Kate King at kate.king@wsj.com