Shopping Center Shift
Retail owners rethink tenanting strategies.
For neighborhood and community shopping
center owners, it’s a time for reflection. Though they haven’t experienced the
numerous headline-grabbing store closures plaguing big-box and mall owners,
they are facing many changes in consumer behavior — and too few changes in
vacancy rate for neighborhood and community shopping centers fell by a mere 30
basis points year over year to 10.7 percent at the end of 2012, according to
Reis. Asking rents increased only 0.5 percent during the same period, from
$18.98 per square foot to $19.08 psf.
will need to compress in a much more significant fashion before rent growth
breaks out of its rut,” says Ryan Severino, a senior economist at Reis.
retail development is at historic lows. Construction starts fell to 5 million
square feet in 4Q12, according to CoStar. And Severino expects that, without
much construction activity, even weak demand will push down vacancy rates and
push up rents this year.
are experiencing the new normal,” says Shawn Massey, CCIM, partner with The
Shopping Center Group in Memphis, Tenn. “With the lack of supply and good
space, negotiations favor landlords these days. They’re able to pick and choose
tenants based on credit, experience, and other factors.”
of those factors is the brick-and-mortar tenant’s ability to thrive even as
consumers increasingly shop online. Shopping center owners are now considering
once unacceptable service tenants and traditional triple-net retailers, among
because the potential impact of Internet sales is still unclear — and a full
economic recovery still only a dream — retail owners and investors are hedging
their bets. They’re taking a close look at their tenant mix and how their space
is being utilized. And, in the process, they’re changing the face of today’s
neighborhood and community shopping centers.
formula for a successful shopping center tenant mix hasn’t changed much since
the market downturn. “Ideally, you would want some type of grocery tenant to
bring in the everyday shopper, along with one or two fast-casual restaurants on
end caps to bring in the frequency-of-visit customer,” Massey says. Depending
on the center’s size, junior anchors such as fitness centers or pet supply
stores may be appropriate, he adds. The balance might consist of general retail
and service tenants.
these days, owners and investors are less apt to take a risk on retail tenants.
“Compositionally, anchor tenants tend to be better quality retailers, in terms
of company strength,” says Michael V. Pappagallo, chief operating officer of
Kimco Realty, a real estate investment trust that owns and operates a portfolio
of approximately 900 neighborhood and community shopping centers. Specialty
retailers like Whole Foods and Fresh Market are also emerging as strong
anchors, he says, particularly in neighborhood centers, while national apparel
and pet supply companies are becoming more prevalent in
community centers. For smaller spaces in these centers, owners prefer franchises
vs. mom and pop stores, Pappagallo adds.
and investors want national names in their center as perceived better credit to
balance out their tenant mix,” Massey explains. “A lower rent with national
credit may actually have a greater value upon a sale.”
retail sector has improved enough that shopping center owners can put capital
for retrofits and tenant improvements into these deals again. “That’s critical
in getting credit retail leases completed,” says Jonathan E. Lindsey, CCIM,
broker with The Shopping Center Group in Birmingham, Ala. “When the world
turned upside down, landlords weren’t funding deals, and tenants were shy about
expanding. But in the past two years we’ve seen great activity.”
will account for 42 percent of new retail units in 2013, according to
Chainlinks, with strong fast-casual tenants such as Five Guys and Chipotle
leading the way.
restaurant franchises are also expanding. Those specializing in breakfast —
Dunkin’ Donuts, Starbucks, Huddle House, and others — are looking for space on
drive-in end caps in smaller centers on the “going-to-work side of the road,”
says Tom Rohde III, CCIM, vice president of Rohde Ottmers Siegel Realty in San
Antonio. Well-established QSRs such as McDonald’s and Taco Bell are now working
the San Antonio breakfast market as well.
is preparing for what could be the biggest retail expansion in his market in
decades, thanks largely to credit tenants. In addition to the influx of
restaurants, Walmart has plans for 12 new supercenters and several compact
Neighborhood Market stores, which could result in as many as two dozen new
shopping centers, Rohde says. He adds that San Antonio-based grocer H-E-B,
which operates more than 300 stores in Texas, is expected to compete with new
openings as well.
wonder brick-and-mortar shopping center owners are looking for stability.
Online and nonstore retail sales jumped 11.6 percent from 2011 to 2012,
according to the Commerce Department, more than double the average for all
retail. Many of the tenants that are staples in community and neighborhood
centers are now competing with the Internet, and some are losing that battle.
“Owners are concerned about tenants selling widgets — whatever they might be,”
says Larry Hausman, CCIM, senior associate with Marcus & Millichap in
Louisville, Ky. For example, RadioShack, one-product retailers such as GameStop,
and Barnes & Noble have seen declining same-store sales and are expected to
close hundreds of stores this year, according to USA
attributes this problem, in part, to a lack of a national Internet sales tax,
which leaves brick-and-mortar retailers at a disadvantage. In March, members of
the Senate voiced support for broader sales-tax collections on online
purchases, but it’s unclear whether such a law will be passed.
shopping competition has caused shopping center owners to rethink the formula
for stability in recent years. “Our definition of a retail tenant has changed,”
Massey explains. “We are seeing more nontraditional users go into shopping
centers, including medical, educational, and fitness centers.” Most of these
companies offer services and/or experiences that can’t be purchased online — at
least not yet.
addition, “Formerly prohibited uses, such as massage spas and motor scooter
shops, are now viable additions to shopping centers, so landlords are compelled
to approach anchor tenants for permission to pursue these leases,” says George
C. Larsen, CCIM, of Larsen/Baker in Tucson, Ariz.
medical tenants are perhaps the most notable. Healthcare users such as
radiology centers, dialysis centers, or physical rehabilitation spaces were
once only seen in multistory office buildings, says David J. Ahn, CCIM, CPM,
vice president of asset services with MEI Real Estate Services in Los Angeles.
Now those users are moving into community and neighborhood shopping centers,
which offer advantages such as adequate parking, easier access, and better
migration is a boon for shopping center owners, according to Bob Matias, senior
vice president of retail at Equity in Columbus, Ohio. “Healthcare tenants tend
to be strong credit, sign long-term leases, have a very low default rate, and
drive daytime traffic to the center,” he explains.
cites a recent lease of 5,000 sf in a Louisville community center to a
hospital-owned physician group. “Other tenants are thrilled with the increase
in traffic,” he adds.
expects this trend to continue for many years, driven by the baby boom
generation’s increasing need for convenient medical services.
retail tenants that traditionally favor free-standing properties — T-Mobile and
Dunkin’ Donuts, for example — have also begun to backfill space created by the
increase in shopping center vacancy. “It makes more sense economically,” says
Randy Blankstein, president of The Boulder Group in Northbrook, Ill., which
specializes in single-tenant net lease properties. “Shopping center owners with
above-average vacancy are enticing retailers by offering lower rents than a
single-tenant property.” Free-standing properties generally command higher
rents due to their relative visibility and ease of access, he adds.
these aren’t triple-net leases in the strictest sense. In a shopping center,
the landlord is responsible for the property’s roof and structure as well as
billing for common area maintenance, taxes, and insurance, Blankstein explains.
The property owner can also collect management and/or administration fees.
trend, coupled with already reduced expansion plans, has created a limited
[triple-net] development pipeline,” Blankstein says.
brick-and-mortar retailers that thrive despite the Internet’s growing
prominence will need less space in the coming years. As younger generations’
buying power increases, Ahn expects to see more interactive showrooms for
products that can be stored elsewhere and delivered the next day. “The Apple
Store model works with clothing, electronics, office supplies, furniture, and
most nonperishable goods,” he says. “It also allows for a higher number of
stores in a small area. [Shopping center owners] can now provide double the amount
of retailers in the same space.”
there be enough viable tenants to fill this excess space? Pappagallo points out
that developers had to add more small-shop space to neighborhood and community
centers before and during the recession to make projects pencil out. But during
the last few years, there weren’t enough sustainable businesses to prevent
an ideal tenant mix alone might not protect a shopping center from falling
victim to the market cycle. “If a small center is anchored by a supermarket,
for example, it’s not who else is in there, but how much space,” Pappagallo
explains. “In that case, 20,000 to 30,000 sf of small-shop space allows for
healthy business among the tenants.” More space can lead to more vacancy.
some markets, to get deals done, “Landlords are now more willing to
de-commission space,” Lindsey says. For example, before 102,000 sf of shopping
center space was delivered in Lindsey’s market last year, a tenant that had
signed on for 4,000 sf pulled out. Rather than holding out for a tenant who
could fill that entire space, the landlord backfilled 3,400 sf with Lindsey’s
client and de-commissioned the rest. “The psf rent rate came down, allowing the
tenant [which originally only wanted 2,400 sf] to take on the additional 1,000
sf,” Lindsey says.
the economy fully recovers, such measures may be necessary to make shopping
centers viable. But it remains to be seen whether retail owners, investors, and
developers have recalibrated enough to create centers that can withstand the
market cycle’s next fluctuation. In the meantime, we’ll give them plenty of
space to reflect.
Rich Rosfelder is
associate editor of Commercial Investment Real Estate. Mike Pappagallo shares more of his thoughts on today's retail trends in the latest CIRE podcast.
Healthcare service providers are quickly becoming fixtures in
community and neighborhood shopping centers throughout the country. This makes
sense for landlords, who like these tenants’ creditworthiness and ability to
generate traffic. But why are medical tenants drawn to these spaces? And how
can shopping center owners entice them?
Chad Pinnell, senior vice president of healthcare
at Equity in Columbus, and his colleague Bob Matias, senior vice president of
retail at Equity, addressed these questions at the International Council of
Shopping Centers’ University of Shopping Centers in March in the course “How to
Attract Medical Facilities to Your Shopping Center.”
“Healthcare providers are increasingly
interested in patient experience,” Pinnell explains. “Retail centers are easily
accessible, easy to navigate, and conveniently located where people live –- all
of which add to a good experience.” Plus, he adds, the traffic generated by shopping
center anchors gives these medical tenants an advantage over the competition.
Which centers these tenants choose largely
depends on the type of services they provide. “For instance, a pediatric group
might find it advantageous to locate at a grocery-anchored shopping center
because that’s where all the moms in town are showing up two times a week,”
Pinnell says. “Or a sports medicine practice may find a location near a large
fitness center or sporting goods store to fit their market profile better.”
But challenges can arise during lease
negotiations. “This is not because either party is unreasonable, but rather
because they are speaking two different economic languages,” Pinnell says. He
recommends translating the retail lease terms in a healthcare lease to make
them clearer to prospective tenants.
And often, medical tenants seek lower rents and
more-costly tenant improvements than traditional retail tenants. “Remember to
weigh this against the benefit of having a long-term, stable tenant that is a
good traffic generator,” Pinnell adds.
Pinnell likes to cite the example of Ohio State
University’s 30,000-sf CarePoint medical center, which is located in a Kroger
grocery-anchored shopping center in Orange Township, Ohio. When CarePoint
opened in November 2010, new families were rapidly moving into the surrounding
area. And those families were shopping at Kroger. Within nine months the
facility began to reach patient volume capacity, and expansion plans were made.
“Two years prior, Ohio State’s competitor had
built a much larger facility about three miles away in a traditional medical
office setting –- a quarter-mile off the road in a quite serene setting with no
traffic -- and no retail,” Pinnell says. “That facility continues to struggle.”