Shopping center owners have found themselves in a completely unfamiliar position: for the first time in 20 years, demand for commercial space exceeds supply.
That demand has soared recently and, after years of quiet construction and a purge of underperforming properties, it has found itself in a retail market with less space available. The properties that survived the purge took on tenants who would attract more buyers and give them more reason to stay. This has meant more restaurants and places that promote recreational experiences such as ax throwing and, more recently, pickleball. It also meant less space for traditional retailers that were not performing well, such as bookstores and clothing brands.
Because of these measures, “there’s not as much tenant redundancy and landlords are creating much more robust tenant mixes,” said Barrie Scardina, president of Americas retail services, agency leasing and alliances at Cushman & Wakefield, a real estate. “We are seeing one of the most productive occupations recorded in the last 10 years.”
Shopping center vacancy is the lowest in two decades at 5.4%, Cushman & Wakefield said in a recent report, and the advantage in rent negotiations has shifted from tenants to landlords.
To meet demand, developers are looking for distressed and bankrupt properties — or even locations where retail would be better suited than current use. Partners Capital is converting a 100,000-square-foot office complex near Las Vegas into a $30 million project called Cliff that will include restaurants, boutiques, health and wellness operators, entertainment space and a central bar . This is a change from what the developer was doing just a few years ago, when it was selling off much of its retail center portfolio and moving into industrial buildings that housed tenants such as logistics providers, said Bobby Khorshidi, company’s president.
Partners Capital’s decision is an apt representation of how the fortunes of office properties and shopping centers have shifted.
David Larcher, chief executive of Vestar, a developer in Phoenix that is planning several projects, including the second phase of Vineyard Towne Center, a 260,000-square-foot shopping center in Queen Creek, Arizona, said the pandemic has been “good for retail .”
“There was a lot of derelict space converted to other uses, and retailers with a lot of debt that were at their fingertips were squeezed out,” he said.
While the pandemic may have accelerated the recovery, it is underpinned by a shift that began more than a decade ago. Following the financial crisis and recession of 2009, and in the context of the growth of e-commerce, retailer bankruptcies led to a glut of space that led many investors to sell or convert shopping centers and adopt offices, apartments and warehouses. Shopping center space, which increased from 2006 to 2009, began to decline – mainly in two waves, first from 2009 to 2016 and then again during the pandemic.
Shopping centers that still existed changed strategy to meet changing consumer tastes, and landlords brought in high-traffic tenants, including restaurants and entertainment centers, fitness operators, boutique services, public meeting areas, and facilities. doctors.
In some cases, developers are adding apartments, grocery stores, hotels and offices while reducing excess store space.
Trademark Property Company is planning to redevelop a 470,000-square-foot center in Arlington, Texas, reducing retail space by half and adding office, residential, hotel and entertainment uses.
Similarly, Shopoff Realty Investments plans to transform a vacant Macy’s and Sears that houses the Westminster Mall south of Los Angeles into housing and about 25,000 square feet of food retail space such as restaurants. The project is part of the company’s strategy to buy and convert distressed retail properties. It typically reduces store space by 60 to 90 percent, said Bill Shopoff, founder of the company, which is based in Irvine, California.
“There are enough of these opportunities to keep our pipeline well supplied for several years,” he said.
Outdoor centers in high-growth markets such as Phoenix, Nashville and Austin, Texas, are leading the resurgence, said Cushman’s Scardina and other industry experts. High-end malls also have tight spaces, she added.
The industry has also seen an increase in demand in recent years, as in-person shopping saw a slight resurgence and more retailers began using stores as distribution points. Nationally, the average rental rate of nearly $24 per square foot in the first quarter of this year was almost 4% higher than the previous year. In some cases, landlords are able to increase rates on new leases by more than 30% over the previous lease, said Terry Montesi, founder of Trademark Property Company, a developer of retail and mixed-use properties in Fort Worth.
The current environment is reigniting investor interest. Because retail properties were falling into disrepair, their values generally did not increase as much as apartments and warehouses in recent years. As a result, shopping centers can generate attractive returns compared to more expensive assets in a time of stubbornly high interest rates.
“The fundamentals of retail real estate are the strongest of my career,” said Montesi, who founded Trademark in 1992. “Capital markets have not yet fully adapted to retail, but they are warming up.”
But some threats can get in the way of the good times. Most notably, industry experts say, consumers are feeling pressure from inflation and have cut back on discretionary spending, as recently reported in Walmart and Target’s quarterly earnings. Both shopping center owners and retailers are being squeezed by higher interest rates, as well as rising construction and insurance costs, which are increasing occupancy expenses.
Investors are also keeping an eye on struggling retailers, as more apparel stores like Express and Rue21 file for bankruptcy and big retailers like Macy’s and Walmart close underperforming locations.
Meanwhile, shopping centers look better than they have in a long time and spaces that remain vacant are often quickly occupied by other tenants.
During the pandemic, developer NewMark Merrill secured pre-leasing commitments for 100% of its Rialto Village project, a 96,000-square-foot center that opened last year in California’s Inland Empire region, said Sanford Sigal, chief executive of group. A decade ago, pre-leasing commitments typically filled 65 to 70 percent of a center, he said.
“Every time I went to a party of any kind and told someone I was in the shopping center business, people said, ‘Oh, poor guy!’” said Sigal, who bought four shopping centers in Chicago for about $ 100 million this year. “So the idea of getting calls from brokers the day after a store announces closure is very unusual. Maybe we are the cockroaches of Earth’s extinction event.”