Feasibility of Repositioning Legacy Retail into Convenience Formats (U.S. 2025)

3 Star Retail Storefront, Pepperwood Plaza

Introduction: 

Legacy retail formats – from vacant big-box stores to defunct malls – are increasingly being redeveloped into convenience-oriented retail hubs. These repositioning strategies involve converting large, outdated spaces into smaller, high-demand retail units (such as quick-service restaurants, fitness studios, discount stores, and service-oriented shops) and carving out valuable pad sites on outparcels. This report examines the feasibility of these strategies in the current U.S. retail real estate landscape (2025), drawing on the MMCG database as well as market research. We cover the overall retail context, the rise of convenience formats, financial sustainability (rent vs. sales), outparcel value trends, the “shadow-anchor” effect of adjacent anchors, and capital market implications. The goal is to provide investors and lenders with a data-driven, analytical perspective on converting legacy retail into thriving convenience centers.

U.S. Retail Real Estate Overview (2025)

Demand Recalibration: The U.S. retail market entered the second half of 2025 in a period of “recalibration” following a wave of late-2024 and early-2025 store closures. High-profile bankruptcies and liquidations (e.g. in department store and specialty apparel sectors) led to two consecutive quarters of negative net absorption by mid-2025. Approximately 7 million square feet of space returned to the market in Q2 2025, pushing overall availability to its highest level in three years. However, this uptick comes off historically tight levels – total retail availability remains ~15% below the prior 10-year average despite recent closures. In other words, even after the shakeout of weaker retailers, vacancies are near record lows: the national retail vacancy rate stands around 4.3% in 2025 (up slightly from a trough of ~4.0% in late 2023). These figures underscore the resilience of underlying fundamentals and a structurally supply-constrained market.

Leasing Fundamentals: Landlords have seen robust backfill demand for vacated stores, resulting in surprisingly strong leasing momentum in 2025. In fact, newly available space was leased at the highest quarterly volume in three years during Q2 2025. The market is characterized by rapid absorption of small spaces: over 50% of leases signed in the first half of 2025 were for spaces that had been on the market less than 10 months (and nearly 30% were listed for under 5 months before finding a tenant). The median time to lease space hit a 15-year low of just 7.3 months as of mid-2025. This rapid leasing velocity reflects both limited supply of quality space and tenants’ eagerness to capitalize on any newly vacated units. Notably, leasing continues to be dominated by smaller format spaces – typically freestanding pads or in-line suites. Nearly two-thirds of Q2 2025 lease transactions were for units 2,500 SF or smaller, and almost 90% were under 5,000 SF. This tilt toward small-space absorption highlights a structural shift in the retail market toward convenience and service tenants (discussed in the next section). Higher-quality spaces lease especially fast (often under 5 months on market), but such spaces are scarce – less than 25% of available retail space is rated 4-5 stars (modern quality) and nearly 60% of vacant space is over 40 years old. In short, supply is tight and skewed toward older, lower-quality stock, which is exactly why redevelopment of legacy formats has become an attractive strategy.

Rent Growth Trajectory: Retail asking rents continue to rise in 2025, but the pace has moderated significantly from the post-pandemic surge. As of mid-2025, national retail rents were up roughly 1.8–1.9% year-over-year, the slowest growth rate in several years. This is a comedown from the cyclical peak (~4% YoY rent growth in late 2022), reflecting a more balanced environment as availability inches up and retail sales growth cools. Even so, rent gains remain positive and above historical norms – multi-year rent growth spreads are still near multi-decade highs despite recent compression. Effective rents are underpinned by the low vacancy and minimal new supply. Occupancy costs for tenants are in a normal range given post-pandemic sales levels, suggesting that current rents are generally supportable by retailer revenues. In fact, core retail sales (excluding e-commerce, gas, and auto) have risen over 30% nominally since 2019, and even after inflation, real retail spending sits ~10% above pre-pandemic levels. This growth in tenant top-line has helped keep rent-to-sales ratios in check. Going forward, rent growth is expected to decelerate modestly as the market digests the backlog of vacated space from recent closures. However, because most of that space is low-quality or in less competitive formats, it is forecast to backfill relatively quickly – meaning rent growth should roughly track historical averages over the next few years. The supply-constrained nature of the sector (with construction at historic lows) and the steady shift toward service-based retail tenants should support long-term rent stability. In summary, the U.S. retail real estate context in 2025 is one of tight supply and recalibrating demand: vacancy is low, leasing of small spaces is brisk, and rents are rising modestly – an environment generally conducive to repositioning projects that can bring desirable space to market.

Rise of Convenience-Oriented Retail Formats

Growth Drivers: Convenience-oriented retail – defined by smaller footprints, quick-turnover uses, and service or necessity-based offerings – has become the primary engine of absorption in the current market. This shift is driven by evolving consumer behavior: shoppers increasingly favor experiences and essential services that cannot be delivered online, as well as quick “stop-in” trips for food or errands. For the first time on record, service-based tenants are leasing more space than goods-based retailers in the U.S. retail market. Categories such as restaurants (especially fast-casual and quick-service eateries), beverage shops (coffee, smoothie, etc.), fitness and wellness centers, entertainment/experiential concepts, and health & personal care services are expanding rapidly, filling spaces formerly occupied by traditional soft-goods merchants. These convenience and service tenants are more insulated from e-commerce competition and benefit from consumers’ renewed focus on in-person experiences post-pandemic. In contrast, many legacy categories (e.g. department stores, apparel, electronics, large-format home goods) have contracted, freeing up real estate that is being refilled by smaller, nimble users. The result is a broad repositioning of the tenant mix across shopping centers: more food, fitness, medical, discount variety, and boutique services, less traditional big-box retail.

Tenant Categories and Expansion Trends: Several tenant segments exemplify the convenience-retail growth trend: Quick-Service Restaurants (QSRs) and fast casual dining chains are aggressively adding locations to meet demand for off-premise dining and drive-thru convenience. Fitness operators (from large gyms to boutique studios) have been leasing both standalone sites and space in strip centers, capitalizing on consumers’ return to gyms and personal wellness. Discount retailers and dollar stores (e.g. Dollar General, Five Below) are also proliferating – these value-oriented brands often take smaller footprint stores (5,000–15,000 SF) in secondary markets or as fillers in shopping centers, providing everyday convenience retail. Indeed, some of the most active tenants in 2025 include Dollar General, Five Below, Boot Barn, and a range of fitness chains – all of whom accelerated expansion by backfilling newly available spaces. Additionally, personal and professional services (salons, clinics, dental offices, urgent care, pet services, etc.) have been growing their presence in retail centers, as these businesses seek accessible locations near the customer base. What unites these categories is a focus on frequent, needs-based or experience-based visits – the kinds of trips that keep community retail centers relevant and well-trafficked.

Leasing Velocity and Absorption: Convenience-oriented formats have proven extremely adept at absorbing second-generation space. As noted, small and mid-size spaces are leasing quickly – over two-thirds of Q2 2025 lease deals were for units under 2,500 SF, reflecting how deep the demand is at the small-shop level. Landlords report exceptionally strong demand to backfill any space that “goes dark,” often with multiple tenants competing and new leases signed at 20–40% higher rents than the prior tenant in that space. This dynamic has enabled owners of struggling properties (e.g. aging power centers or half-vacant malls) to carve up large boxes into multiple smaller suites or pad sites and attract a whole new roster of tenants. Net absorption metrics underscore the outperformance of convenience retail formats. For example, in the first half of 2025 “General Retail” – a category largely comprising freestanding single-tenant buildings and pads – logged nearly +0.9 million SF of net absorption, the highest among retail subtypes. By contrast, some legacy formats saw flat or negative absorption (Power Centers had net negative absorption over this period, as big-box vacancies outpaced backfills). Neighborhood and strip centers (often anchored by grocery or services) managed modest positive absorption, indicating that smaller-scale centers are holding their own. Occupancy rates for unanchored strip centers (typically 10,000–50,000 SF convenience centers) are roughly 95.5% on average (≈4.5% vacancy) – only slightly trailing grocery-anchored centers – and this high occupancy speaks to the success of neighborhood-focused tenant mixes. In sum, the market is readily absorbing convenience-oriented retail uses, with demand far outstripping supply for quality small-space locations. This momentum validates the strategy of repositioning larger legacy assets into clusters of smaller, convenience-driven tenants.

Market Absorption and Service vs. Goods Split: Another salient trend is the mirror image relationship between service-based retail growth and discretionary goods retail contraction. Categories like food, health, fitness, and discount retail not only are expanding into new locations but also often replace former apparel, department store, or specialty merchandise tenants. The consumer shift “from buying things to doing things” means experiential and convenience uses are backfilling space that pure product retail left behind. For investors, this trend implies that legacy retail centers can often be revitalized by introducing an improved tenant mix – for instance, converting part of a parking lot or an empty big-box into a set of pad sites for drive-thru eateries, financial institutions, or medical clinics can breathe new life into a center. The data supports this: service-oriented tenants now account for the majority of leasing activity, for the first time overtaking soft-goods retailers in total space leased. This is a structural demand shift that favors convenience retail formats for the foreseeable future. Given the sustained low new construction (discussed later), the primary way to accommodate this demand is through repositioning and redeveloping existing properties – a compelling opportunity for retail real estate investors.

Financial Feasibility: Rent Sustainability vs. Sales Performance

When evaluating conversions of legacy retail to new formats, a critical question for investors and lenders is: will the new convenience-oriented tenants generate enough sales to pay sustainable rents? Feasibility hinges on occupancy cost ratios (rent as a percentage of tenant sales) being within acceptable ranges. Here we break down typical sales-per-square-foot figures and rent benchmarks across key retail formats, using MMCG database figures (sourced from industry reports) to ensure realistic assumptions.

Occupancy Cost Benchmarks: For most healthy retailers, occupancy costs (which include base rent plus common area fees and taxes) typically range from about 6% up to 10% of gross sales. Rent alone is often targeted around 6–8% of sales for many segments, though some high-margin uses can tolerate closer to 10%, and low-margin uses may need <5%. Keeping rent in this range allows tenants to cover other expenses (labor, cost of goods, etc.) and still earn a profit. In the current market, the MMCG data affirms that occupancy cost ratios are in line with historical norms – retailers’ sales growth over the past few years has largely kept pace with rent growth. This implies that as long as new tenants achieve average sales volumes for their category, they should be able to pay the prevailing market rents in repositioned centers.

Sales Density vs. Rent by Format: Below are illustrative sales per square foot figures for various retail formats, alongside the implied sustainable rent levels at typical occupancy cost ratios:

• Quick-Service Restaurants (QSR): Fast-food and fast-casual restaurants generally achieve high sales per square foot thanks to rapid customer turnover. Industry benchmarks show QSRs often generate above $200 per SF annually, with many well-performing units in the $300–$500/SF range or higher. Using an ~8% occupancy cost target, a QSR with $300/SF in sales could sustainably pay around $24/SF in annual rent. In prime locations, top national brands (e.g. popular drive-thru chains) can exceed $500/SF sales – supporting rents in the $40/SF+ range – which is why we observe some QSR pad site leases transacting at very high rents. Example: a Chick-fil-A ground lease in Florida (15-year term) recently traded with rents that reflected a sub-5% cap rate, implying investors believe in very strong sales and rent-paying ability at that site.

• Grocery Stores (Supermarkets): Grocery anchors have among the highest sales volumes in retail but operate on razor-thin profit margins. U.S. grocery stores average roughly $500 in sales per square foot (with top-tier grocers and specialty markets ranging closer to $800–$1,000/SF). However, grocers typically insist on low occupancy cost – often only 2–5% of sales – to remain profitable. This translates to relatively modest rents, commonly $10–$20/SF for large supermarkets (even in strong trade areas). For example, a 60,000 SF grocer doing $30M in annual sales ($500/SF) might only pay $15/SF in rent (3% of sales). While anchor grocers don’t pay high rents, their presence significantly boosts traffic for smaller shops and pads (the shadow-anchor effect discussed later), allowing those smaller tenants to pay higher rents.

• Fitness Centers: Fitness uses vary from big-box gyms to boutique studios, but as a category their revenue per square foot is moderate. A large format gym might generate on the order of $100–$150/SF in membership and ancillary revenue (for instance, a 20,000 SF gym with $2–3 million in revenue). Smaller high-end studios can have higher sales per foot, but generally, fitness tenants aim for occupancy costs no more than ~15% of revenue due to other operating costs. This often equates to rents in the $10–$25/SF range for gym tenants. Indeed, many expanding gym operators seek second-generation anchor spaces at relatively low rent – a key consideration if repositioning a former big-box store into a fitness use. Landlords sometimes accept lower PSF rents for gyms because they draw consistent foot traffic to a center (boosting cross-shopping at other tenants).

• Discount & Off-Price Retailers: Value-focused retailers (dollar stores, off-price apparel, outlet chains) typically have sales densities in the $150 to $300 per SF range. For instance, a Dollar General in a rural market may do ~$150–$200/SF, whereas an off-price apparel store like Burlington might do ~$200–$250/SF. These tenants target occupancy costs around 8% or less given their thin margins. So a dollar store doing $180/SF in sales might afford roughly a $14–$16/SF rent. In practice, many dollar stores sign leases in the $10–$15/SF range in tertiary markets, relying on low real estate costs to maintain their model. Off-price and outlet retailers can sometimes pay more in rent if their sales are strong, but they still expect a “discount” rent relative to premium locations. This must be accounted for when repositioning a legacy space – i.e. splitting a vacant big box into a discount store and service tenants might achieve only moderate rents on the discount user, offset by higher rents on smaller shop spaces.

• Service & Other Convenience Tenants: This category includes everything from hair and nail salons to medical clinics, daycare centers, banks, and postal/shipping stores. Sales (or revenue) per square foot varies widely by service type, but generally these users look at real estate as a percentage of revenue similar to retailers. For example, a medical office might gauge rent against practice income, or a cafe against its sales. Many service micro-businesses can only sustain low absolute rent dollars but take very small spaces (e.g. a 1,200 SF salon might generate $300k/year, ~$250/SF, and can pay $20–$25k in rent which is 8–10% of revenue, equating to ~$20/SF). Financial institutions (bank branches) and clinics often have corporate covenants and will pay market rents for prime pad sites because location is critical for them – these can be in the $30–$40/SF range for new construction pads if justified by the business generated.

Overall, the MMCG data indicates that prevailing rents across convenience retail formats are supported by sales productivity. As of mid-2025, the national average retail sales per SF is roughly $325/SF across all retail (all categories blended), while the average asking rent is about $25/SF – a ratio of ~7.7%, well within healthy occupancy cost bounds. By segment, service-heavy retailers have even seen their sales per square foot rise by relocating to smaller, high-traffic footprints, which offsets higher rents and keeps rent-to-revenue ratios steady. This is a crucial insight for repositioning feasibility: smaller format stores in good locations can achieve higher sales densities, allowing them to afford the higher rents that new construction or redeveloped projects often require. For example, many omnichannel retailers are now opting for “right-sized” stores in prime locations, which raised their sales per SF and prevented rent from growing as a percentage of revenue. Stable rent cost ratios across the sector give confidence that converting a legacy big store into multiple smaller ones can be financially sustainable – each new tenant, if appropriately chosen, can thrive in a smaller space with adequate sales to cover rent. Of course, careful merchandising and pre-leasing are key: a repositioning project should curate a tenant lineup with proven demand drivers (such as a mix of food, fitness, service, and value retail) and verify that projected sales for each use will comfortably cover the pro-forma rents.

From an investor perspective, rents in the $20–$40/SF range for pads and small shops are common in successful repositionings, but those rents must align with sales potential. In many U.S. markets, well-run QSRs, boutique retailers, and medical uses can all support rents in that range given their sales productivity. Meanwhile, anchor spaces might be leased at lower PSF rent (e.g. a grocer at $12–$18/SF) yet still enhance the project’s feasibility by anchoring the tenant mix. The bottom line is that the conversion to convenience retail is financially feasible when done with the right tenant economics – the high sales efficiency of smaller formats and the low occupancy cost ratios observed in 2025 suggest that landlords can achieve attractive rents without overburdening tenants, thereby creating sustainable cash flow.

Outparcel Dynamics: Pad Site Values, Yields, and Investor Appetite

One of the most lucrative aspects of retail repositioning is the creation or enhancement of pad sites (outparcels). Pad sites – typically freestanding buildings or ground leases for restaurants, banks, gas stations, and other single-tenant uses at the front of shopping centers – have become hot commodities in the investment market. They often feature triple-net (NNN) leases to strong tenants, making them low-management, bond-like assets that trade at premium prices. Here we analyze pad site value trends by category, current cap rates (yields), and investor demand dynamics.

High Demand and Stable Yields for Net Lease Pads: Investors in 2025 remain very eager for single-tenant NNN retail properties, including QSR drive-thrus, drugstores, convenience gas marts, and similar pads. Despite the rise in interest rates over the past two years, cap rates in the net lease retail sector have largely stabilized by mid-2025, indicating that the market has adapted to the new rate environmentbouldergroup.combouldergroup.com. According to MMCG’s data and third-party brokerage surveys, the average cap rate for single-tenant retail is hovering around 6.6%–6.8% in mid/late 2025bouldergroup.com, only slightly higher than a year prior. In Q3 2025, net lease retail cap rates were essentially flat (6.57% on average, unchanged from the prior quarter)bouldergroup.combouldergroup.com. This stability signals a resilient investor appetite: buyers and sellers have reached greater consensus on pricing, and transaction volumes have started to recover as a result. In fact, retail investment sales through Q3 2025 totaled $49.5 billion nationwide – an 8% increase over the same period in 2024 – and trailing 12-month deal volume was up 13%, reflecting capital flowing back into the sector as bid-ask spreads narrow. Single-tenant pads are a big part of this activity, as they attract 1031 exchange buyers, net-lease REITs, and private investors seeking stable cash yields.

Pad Cap Rates by Category: Within the net lease pad market, cap rates vary by tenant type and perceived risk. Top-tier QSR and coffee shop pads with strong corporate guarantees and long leases command the lowest cap rates – often in the mid-4% to low-5% range for coveted brands. For example, MMCG records note that well-located QSR deals in 2025, such as a 15-year Chick-fil-A ground lease in Florida, are still trading below 5% cap rates. Similarly, other blue-chip fast-food pads (McDonald’s, Starbucks, etc.) and popular drive-thru concepts routinely see cap rates in the 4.5%–5.5% range for new 15–20 year leasesbouldergroup.com. Bank branches (e.g. Chase, Bank of America) with long-term leases can also trade in the low-5% range, given the high credit quality, though branch closures in recent years mean investors scrutinize location viability. Gas station & convenience store pads (such as 7-Eleven, Wawa, or Speedway ground leases) tend to trade a bit higher – often in the mid-5% to 6% cap range – due to concerns like environmental factors and more specialized use. For instance, a Wawa convenience fuel center sold in 2025 at around a 5.3% cap, reflecting investor confidence in the tenant but acknowledging the unique usebouldergroup.com. Pharmacy drugstores (CVS, Walgreens) have historically been low-cap assets as well (sub-6% for long leases), but with Walgreens’ recent downsizing announcements, some drugstore deals in secondary markets are trading higher (6.5–7%+ caps) especially if lease term is shorterbouldergroup.com. In the MMCG data, a Walgreens in Kansas sold at a 6.95% cap with 14 years remainingbouldergroup.com – indicating that even within one category, cap rates are sensitive to lease term and location. On average, however, high-quality STNL (single-tenant net lease) assets still command tight yields well below the broader multi-tenant retail market. For example, most private buyers of net lease pads in 2025 are transacting in the 5%–6% cap range for good assets, a more conservative level than the ultra-low 4% caps seen in 2021, but still very favorable historically. This range yields a significant value premium per square foot for pad properties compared to multi-tenant centers.

Value per Square Foot: Because pad sites are usually small buildings on valuable parcels, their sale prices per square foot can be extremely high relative to larger retail. It’s not uncommon to see pad deals pricing at $500 to $1,000+ per SF. For instance, the Chick-fil-A ground lease noted above traded for over $12 million for what is likely a ~5,000 SF building (effectively well above $1,000/SF)bouldergroup.com. A small-format grocery or convenience store pad might sell for $400–$700/SF depending on rent. These metrics reflect the capitalization of long-term lease income more so than the replacement cost of the building. Investors effectively treat a prime pad lease like a bond – valuing the secure cash flow stream – which is why a 4.5% cap rate deal equates to ~22x annual rent, hence the very high price per foot. By contrast, older multi-tenant retail buildings often trade at $150–$300 per SF. This arbitrage creates an opportunity in repositionings: an owner can develop or condo-ize a pad on the edge of a shopping center and potentially sell it at a far higher valuation multiple (and lower cap) than the center as a whole. We discuss this strategy more in the capital markets section.

Yield Spreads and Investor Appetite: The spread in cap rates between different pad categories and other asset classes is informative. In general, net lease retail yields around 6.6% compare favorably to current 10-year Treasury yields (which in 2025 have been around 4%–4.5%). The ~200+ basis point spread is roughly in line with historical norms, offering investors a reasonable risk premium for a passive real estate assetbouldergroup.com. Within retail, the spread between top-tier and secondary net lease assets has widened somewhat – e.g. a Dollar General in a smaller town might trade at 7.0–7.5% cap (as many did in the past year, skewing averages), whereas a coastal Chick-fil-A or Starbucks is sub-5%. The market is effectively stratifying: cap rates remain ultra-compressed for premium locations and tenants, while more average deals have seen an uptick. Yet even those 7%+ cap deals (often dollar stores or pharmacies in less urban markets) are finding buyers, as evidenced by the volume of dollar store trades in 2024–25. Investor appetite thus runs the gamut – private 1031 buyers chasing safety will compete heavily for anything “best-in-class,” driving those prices up, while opportunistic investors can secure higher yielding pads if they are willing to take on slightly more location or credit risk.

Importantly, the net lease investor pool has grown to include more institutional capital of late. Despite higher debt costs, institutions see net lease pads as stable, income-producing alternatives to bonds. Market alignment has improved – the bid-ask spread for retail net lease properties tightened to under 30 bps in late 2025, indicating buyers and sellers are roughly in sync on pricingbouldergroup.combouldergroup.com. The result is that transaction velocity is expected to increase. The MMCG database notes that by Q3 2025, net lease market supply (number of listings) had actually ticked down slightly, suggesting that many who wanted to sell have done so and remaining owners are holding on unless they get their pricebouldergroup.combouldergroup.com. This equilibrium is supporting values. In summary, pad site fundamentals are strong: cap rates have flattened out (no longer rising), demand is broad-based, and pricing remains near historically high levels (low yields). For an investor considering repositioning a legacy retail asset, the implication is clear – new pad development on-site can unlock significant value. A well-leased pad can be sold at a premium cap rate (often 100–200 bps lower than the cap rate for the main center), effectively subsidizing the broader redevelopment costs.

Shadow-Anchor Effects: Impact of Anchors on Pad Rents and Cap Rates

“Shadow-anchoring” refers to the influence that a major adjacent anchor tenant (even if separately owned) can have on smaller retailers and pad sites nearby. In the context of repositioning, understanding shadow-anchor effects is crucial: a convenience-focused redevelopment often leverages existing large anchors (or replaces them with new anchors) to drive traffic, boost rents, and compress cap rates for outparcels.

Enhanced Pad Performance Near Anchors: Empirical evidence shows that pads located by high-traffic anchors achieve higher sales and can command higher rents than similar stand-alone locations. For example, a quick-service restaurant pad in the parking outlot of a busy grocery store will benefit from the hundreds or thousands of shoppers that visit the center weekly. These shoppers increase drive-thru volume and walk-in visits to the QSR, thereby raising its sales per SF. The tenant, in turn, can pay a premium rent to be in that location. It is not uncommon to see pad rents in grocery-anchored centers that are 10–20% above comparable rents in unanchored locations, simply because the anchor grocer guarantees a steady flow of potential customers. Similarly, a bank branch or coffee shop next to a popular fitness center or home improvement store will see spillover business from those anchors. This is why many redevelopment plans aim to retain or add a strong anchor (grocery, specialty retail, or even a large format fitness or medical use) and then develop pads around them – it creates an ecosystem where the anchor’s drawing power uplifts the economics of the smaller tenants.

Cap Rate Premium for Anchored Assets: From an investor’s perspective, centers with reliable anchors are viewed as safer investments, leading to lower cap rates (higher values) for both the center and its outparcels. Market data illustrates this clearly. According to an analysis by Matthews, unanchored strip centers in 2025 traded at average cap rates around 7.0%, whereas grocery-anchored centers averaged cap rates closer to 5.7% – a very significant spread. Class A grocery-anchored centers in top markets have been seen transacting even in the low-5% range, versus high-6% to 7% for comparable unanchored properties. This ~130 basis point cap rate difference reflects investors’ preference for the stable traffic and sales provided by anchors. In real terms, a dollar of NOI from a grocery-anchored property is valued much higher than a dollar of NOI from an unanchored one. The MMCG data confirms cap rate differentials: for instance, an example sale in early 2025 saw a Kroger-anchored neighborhood center trade at a 6.1% cap, whereas that same quarter a large unanchored power/community center traded at a 7.0% cap – despite strong tenancy, the latter had a higher yield due to lacking a single dominant anchor. For pad sites, the presence of an anchor can similarly compress the cap rate. A pad that is part of (or adjacent to) a high-performing anchored center might trade 50–100 bps lower in cap rate than a virtually identical pad in a standalone context. Investors recognize that a pad’s success is partly tied to the anchor’s draw; as long as the anchor is healthy, the pad should enjoy stable occupancy and sales, making it a safer bet.

Rent Uplift Due to Anchors: Anchors not only affect valuation yields but also rental rates. Small shop tenants and pad lessees will pay more to locate in a center with a strong anchor. For example, inline shop rents in grocery-anchored centers often carry a premium (sometimes 10-15% higher) over similar inline space in an unanchored strip, because tenants know foot traffic will be larger and more consistent. Pad leases are often negotiated higher when the pad is in front of a well-known anchor – many national fast-food chains have rent escalation formulas that consider expected store volume, so a high-volume location (e.g. outparcel to a busy Costco or supermarket) might justify a higher initial rent. Shadow anchoring thus boosts the revenue side of a repositioning’s pro forma. It’s a lot easier to underwrite aggressive rents for new pads if the pads are shadow-anchored by, say, a top grocery store or a high-traffic home improvement store, than if they were on an island.

Mitigating Risks of Anchor Changes: Of course, the flip side is also true – losing an anchor can hurt the pad and small tenant performance. Many pad leases have co-tenancy clauses or at least are underwritten with the assumption that the anchor stays. Therefore, repositioning legacy retail often involves anchoring the project with a durable use (be it a fresh grocery lease, a popular large format fitness or entertainment tenant, or repurposing an old anchor space into, say, a medical or educational facility that draws regular visits). If an older mall or power center is being converted, an investor will want to ensure either the existing anchors are solid (e.g. a well-performing supermarket or a “daily needs” draw) or bring in a new anchor-equivalent (for example, converting a vacant department store into a multi-tenant medical campus or an indoor sports facility – something that regularly draws people). With that in place, the shadow-anchor effect can be harnessed to maximize pad values.

Case in Point: In many successful redevelopments, the main parcel might not be sold (or might be held for income), but the newly created pad sites are sold off to net-lease investors at great prices. Those pad investors are implicitly betting that the anchor will continue to generate traffic for their tenant. A real-world illustration from 2025: an investor acquired a Kroger-anchored center at ~6.1% cap and shortly after sold an outparcel with a national fast-food tenant at sub-5% cap. The premium pricing on the pad was directly related to the grocery anchor’s presence (as well as the long lease). In essence, the anchor’s credit and magnetism “rubs off” on the pad, allowing the pad’s landlord (or seller) to capture a higher value.

For lenders and investors analyzing repositioning deals, it’s important to factor in these dynamics: a project anchored by a strong daily-needs tenant can underwrite more aggressive rents on ancillary spaces and will likely exit at stronger cap rates. Conversely, projects without an anchor (or with only “shadow” anchors nearby but not on site) should be underwritten more conservatively on both rents and exit cap, to account for the higher risk profile. That said, the 2025 market has shown that even unanchored convenience centers are thriving. As noted in industry research, unanchored strip centers have enjoyed high occupancy (~95%) and steady rent growth, thanks to their tenant mix resilience. They do trade at higher cap rates, but investors are warming up to them, given the strong performance. This suggests that while shadow-anchors add value, well-executed convenience retail can stand on its own in many communities by curating the right mix of local-favorite tenants and services.

Capital Market Implications: Values, Cap Rates, and Constraints on Supply

Finally, we consider the broader capital market factors affecting retail repositioning: the sale price per square foot investors are paying for these assets, trends in cap rates (cost of capital), and how construction and development constraints are shaping the supply-demand balance.

Sale Prices and Value Trends: U.S. retail property values have undergone some re-pricing since the era of ultra-low interest rates, but they remain strong in historical context and have started to stabilize. According to the MMCG database, the average market sale price for retail space nationally is around $200–$250 per square foot as of 2025. Multi-tenant neighborhood and strip centers often transact in the $150–$300/SF range depending on location and rent rolls, while single-tenant pads (as discussed) can fetch several times that on a per SF basis. For example, “General Retail” single-tenant properties in 2025 have a market average price of about $265/SF (price index 179) with cap rates around 7.2% (market rate). By comparison, multi-tenant strip centers show market pricing closer to $257/SF at a similar cap rate ~7.1%. In practice, actual deal pricing varies: in 2025 year-to-date, closed single-tenant retail deals averaged ~$250/SF at a 6.7% cap (indicating many higher-quality net lease trades), whereas strip center deals averaged ~$223/SF at ~7.1% cap. This illustrates that investors are still paying a premium per foot for stabilized single-tenant income streams relative to multi-tenant income. Overall retail pricing peaked in 2022 and saw a slight dip in 2023 as cap rates rose, but 2025 data shows pricing firming up. The market price index for retail (all properties) is in the mid-150s (2014 baseline 100), only a few percentage points off its all-time high. In plain terms, values corrected mildly with interest rates, but there was no crash – now with buying momentum returning, prices are inching back up.

Investment sales trends illustrate this point. Retail transaction volume in 2023 had slowed due to the interest rate shock, but by mid-2025 it rebounded strongly (+13% YoY) as buyers and sellers adjusted to new pricing. Capitalization rates have largely stabilized. After rising by 50–100 bps between 2021 and 2023, retail cap rates flattened out through 2024 and into 2025bouldergroup.com. The MMCG report notes that since mid-2024, cap rates have “moved sideways” and the upward bias has faded. In some segments like net lease, we even see a slight compression in late 2025 due to heavy demand for quality assets. For example, high-quality QSR and pharmacy assets still trade at pre-2022 level yields (sub-5% for the best QSR, mid-6% for long-term drugstores), indicating cap rate bifurcation: average cap rates are higher than 2021, but the top-tier deals remain extremely competitive. For grocery-anchored centers, the evidence of price stability is clear in 2025 deals (e.g. the Kroger center sale at 6.1% cap mentioned above). Meanwhile, older formats like large power centers or malls transacted at higher yields – a 507,000 SF power center in Arizona traded at a 7% cap ($239/SF) in 2025, and some regional malls are only moving at double-digit yields for special situation buyers. This suggests that capital is selective – it will aggressively bid up the convenience and necessity retail assets that are in demand, but expects a risk premium for legacy formats that haven’t been repositioned.

For an investor executing a repositioning strategy, these market conditions are generally favorable. The ability to sell off components (like pad sites) at low cap rates provides liquidity and profit, while the core center can often be refinanced or sold at a reasonable mid-6% to 7% cap once stabilized, which is still attractive given likely acquisition yields on distressed legacy assets were higher. Additionally, construction cost inflation and supply constraints have a silver lining for owners of existing retail: lack of new supply supports the value and rent growth of well-located existing assets.

Construction Constraints and Redevelopment: It is important to highlight that ground-up retail development is at historic lows. Elevated construction costs and high financing rates have made new development economics challenging across most of the country. As of mid-2025, retail construction starts hit a record low, and under-construction retail space fell below 50 million SF nationwide – an astonishingly low level for a country the size of the U.S.. Developers find that rising costs have outpaced achievable rents, especially as alternative property types (industrial, multifamily, mixed-use) often yield higher returns for new projects. Essentially, it’s hard to justify building a new shopping center when construction expenses are so high and retail rents (while growing) haven’t doubled or anything. Most of what is being built new falls into two narrow categories: small pad developments or build-to-suit big boxes for expanding national tenants. Speculative retail projects are extremely limited – less than 50 million SF of speculative retail space was delivered in total since 2020, whereas in the same time over 157 million SF of obsolete retail was removed or repurposed. This net demolition of excess retail stock has materially tightened supply and underpins the positive fundamentals we discussed (low vacancy, rent stability).

For repositioning feasibility, the implication is that redeveloping or re-tenanting an existing site is often far more viable than building new elsewhere. Since ground-up retail is scarce, tenants have few options for brand new space; they are therefore more willing to occupy refurbished second-generation spaces or new pads carved out of older properties. Repositioning projects face less competition from shiny new shopping centers than in past cycles. Moreover, the high construction cost environment makes adaptive reuse of legacy structures or parcels attractive – often the bones (parking, infrastructure, zoning entitlements) are already in place for a retail site, which can save tremendously on costs versus raw land development. However, one must still navigate the feasibility gap: the misalignment between development costs and rents. In many cases, successful repositionings involve partial demolition or site work (to create pad sites or reconfigure space) – these costs can be significant. Lenders will want to see that projected rents (and eventual values) justify the capital expenditure. The current data helps that case: with rents for small-space retail rising and virtually no new supply, one can project rent growth or at least sustained rents with more confidence. Additionally, the constrained pipeline means any new supply delivered via repositioning will likely be met with solid tenant demand, even if the economy experiences headwinds. In essence, the lack of new retail space coming online creates a tailwind for redevelopments – they are filling a needed gap in modern space supply.

Capital Markets Outlook: Looking ahead, most industry analysts expect retail real estate values to remain firm or even improve as interest rates stabilize or potentially decline. The Federal Reserve’s actions in late 2025 (a 25 bps rate cut, per market reports) have signaled a shift that could lower capital costs slightlybouldergroup.com. While cap rates do not move in lockstep with interest rates, a friendlier rate environment in 2026 could further widen the investor pool and keep cap rates in checkbouldergroup.combouldergroup.com. Many investors have dry powder ready to deploy into retail, especially into segments that proved e-commerce-resistant and pandemic-resilient (which convenience-oriented retail certainly did). Liquidity in the debt markets is also improving – rising transaction volume contributes to more loan payoffs and thus more capacity for new loans, as noted in the MMCG analysis. Construction financing remains a challenge for speculative projects, but for projects with pre-leases or strong economics (like redeveloping a prime corner into a few pads and a grocery), lenders are increasingly on board, given the stabilized outcomes we are seeing.

In conclusion, the capital market backdrop for retail repositioning is cautiously optimistic. Values per square foot for retail assets are solid and supported by fundamentals; cap rates, while higher than the trough, are now steady and allowing deals to transact; and the shortage of new supply due to construction constraints creates an opportunity for repositioned assets to capture outsized tenant demand. Investors and lenders focusing on U.S. retail should note that convenience-oriented formats and pad sites are “where the action is.” The data shows these uses driving leasing, achieving sustainable rents relative to sales, and garnering investor favoritism in pricing. By converting legacy retail properties into the types of spaces and pad sites the market currently craves, one can align with both tenant demand and investor demand – a recipe for successful repositioning. Every project will have its specifics, but at a macro level, 2025 is a conducive time to reposition outdated retail into a modern convenience-oriented asset, as the sector recalibrates and redefines itself for long-term resilience.

Table: Key Metrics Summary (2025)

Indicator (U.S. Retail)	Value/Trend (2025)	Source
Vacancy Rate (All Retail)	~4.3% (near historic low; slight uptick from 4.0% in 2023)	MMCG Database
Availability vs 10-yr Avg	~4.8% availability (15% below 10-yr avg ~5.8%)	MMCG Database
Lease Velocity (Small Spaces)	Median 7.3 months to lease (15-year low)	MMCG Database
% Leases <5,000 SF (Q2 2025)	~90% of leases (small-format dominance)	MMCG Database
Rent Growth YoY	+1.9% YoY (national avg asking rent ~$25/SF)	MMCG Database
Sales Growth (Core Retail vs 2019)	+30% (nominal) / +10% (real) above 2019 levels	MMCG / Census
Occupancy Cost Ratios	Steady (rent ~6–8% of sales on average)	Industry Survey
Pad Site Cap Rates (QSR example)	~4.25% – 5.5% (prime 15-20yr QSR lease)	MMCG / Boulder
Unanchored Strip Center Cap Rate (Avg)	~7.0% (Class A ~6.9%, B ~7.2%)	Matthew
Grocery-Anchored Center Cap Rate (Avg)	~5.7% (Class A ~5.4–6.1%)	Matthews
General Retail Price per SF (2025)	~$250/SF (avg single-tenant deal), cap ~6.7%	MMCG Database
Strip Center Price per SF (2025)	~$220–$260/SF (market avg), cap ~7.1%	MMCG Database
New Retail Construction Starts	Historic low (under 50 million SF U/C nationally)	MMCG Database
Obsolete Retail Removed (2020–2025)	~157 million SF demolished/repurposed	MMCG Database

Sources: MMCG internal database (synthesized from CoStar®, IBISWorld® reports) and third-party market research.

Conclusion: In the evolving U.S. retail landscape of 2025, repositioning legacy retail properties into convenience-oriented formats appears not only feasible but often highly attractive. The macro fundamentals – constrained supply, diverse tenant demand, and recalibrated rents – create a supportive backdrop. Convenience retail tenants are absorbing space at an unprecedented pace and have the sales productivity to support market rents. Pad sites and outparcels, in particular, offer outsized returns, with strong investor demand keeping their values elevated and cap rates low. The presence of reliable anchors can amplify these benefits, enhancing both the operational performance and valuation of redeveloped centers. Of course, execution is key: developers must mind the cost-to-rent equation in light of high construction costs, and curate the right tenant mix to maximize traffic and sales. Not every legacy property will turn into a goldmine – secondary locations with weak demographics remain challenging. However, the national trend is clear: smaller, convenience-driven retail is the future, and repositioning strategies that align with this trend are being rewarded in the marketplace. Investors and lenders should approach such projects with an analytical eye – leveraging data on sales per SF, occupancy costs, and cap rate comps – but can take comfort that the sector’s “demand recalibration” has largely played out positively for convenience retail. In a supply-constrained environment, converting yesterday’s big boxes and malls into tomorrow’s service-oriented centers is not just a defensive play, but an accretive one, tapping into the resilient segments of brick-and-mortar retail for years to come.

October 24, 2025, by a collective authors of MMCG Invest, retail feasibility study consultants.

Sources:

• MMCG Database

• Matthews U.S. Retail Market Report (2025)

• Boulder Group Net Lease Market Report (Q3 2025)

• JLL Retail Capital Markets Insights (2025)

• CBRE U.S. Retail Figures (Midyear 2025)

• Selected Retail Real Estate Transactions (2025)

• Placer ai Reports (2023–2025)

• Chain Store Guide (2025)

• National Retail Federation Reports (2025)

• U.S. Census Bureau – Retail Trade Data

• Bureau of Labor Statistics (2025)

• Federal Reserve Policy Statements (Q3–Q4 2025)