In some markets, a good space is hard to find.
that are back in expansion mode are bumping up against a big obstacle — a lack
of inventory when it comes to good real estate locations. The limited supply of
new retail construction has been a huge help to improving absorption and
vacancies. Yet the market has reached a tipping point where good space is hard
to find, and many retailers are still reluctant to commit to the higher rents
now needed to support new development.
have taken their foot off the brake and are very aggressively pursuing deals
again,” says Brian Sorrentino, CCIM, director of ROI Commercial Real Estate in
Las Vegas. There were 4,490 proposed retail and restaurant store openings in
2014, according to the International Council of Shopping Centers, with dollar
stores the most active sector. In addition, the nation’s largest restaurant
chains grew their unit count by 2.2 percent, to more than 220,000 locations,
according to Technomic’s 2014 report on U.S. restaurant chains.
broad industry view shows a retail recovery that continues to move forward at a
fairly sedate pace. During 2014, the improvement in occupancies at neighborhood
and community shopping centers was relatively flat. Vacancies declined just 20
basis points for the year to reach 10.2 percent, according to Reis. Last year,
mall vacancies actually rose 10 basis points to reach 8 percent, due in part to
a number of Sears store closings during fourth quarter.
a deeper dive into individual markets reveals a completely different story.
Retailers and restaurants are back in full force looking to open new locations,
and they are having an increasingly difficult time landing prime locations amid
stiff competition. “There has been very little new space delivered to the
market since 2009, and everyone is fighting for the same space,” Sorrentino
says. “Good space is very tight, and nobody wants the overbuilt secondary
space.” In Las Vegas, for example, there is strong demand from quick service
restaurants looking for 2,500-square-foot end-caps with patios, which are
locations that are few and far between, he adds.
Memphis, Tenn., retailers such as Ikea, H&M, and Bass Pro Shops have
recently opened new stores or committed to leases. Wireless carriers such as
AT&T, Verizon, and T-Mobile are continuing to grow. On the restaurant side,
fast casual concepts have been thriving, along with renewed activity from QSRs
including Hardee’s, Dairy Queen, and Krystal. Specialty grocers such as
Sprouts, Fresh Market, and Whole Foods also have been expanding.
challenges for many tenants are the lack of available quality space and rising
rents. Several years of limited new supply coming online coupled with continued
expansion by both retail and restaurant tenants is creating a shortage of
quality space. “We saw so little development through the great recession, other
than build to suits, that robust demand is far outstripping the supply,” says
Shawn Massey, CCIM, CRW, CLS, a partner at the Shopping Center Group in
the current competitive market is starting to recall the frothy market of
2005–06, when a high level of expansion created intense competition for top
retail real estate, today’s market has a key distinction. A decade ago, if the
right space didn’t exist, someone built it. Today, that is not the case, at
least not yet.
we are going to see new projects coming out of the ground again in the next six
months,” says Dave Denton, CCIM, vice president of real estate brokerage at DAR
Development in Grand Rapids, Mich. “But the difficult part is the pricing
difference between new construction and existing space that is good quality and
in good locations.” Buildings costs have increased in recent years, making new
space more expensive.
example, top rates for existing retail space in Grand Rapid’s main retail
corridor are between $16 and $22 psf triple net. New construction in the same
area would rent for $35 psf or higher. Some national retailers can pay those
rents, but smaller shops and franchisees in this market just can’t pay $35 or
$45 psf and make money, Denton says.
key difference in today’s retail market is the sizable performance gap that
exists between class A space and that of class B and C centers. Tenants are
gravitating toward quality properties and locations, while secondary and
tertiary retail corridors and B and C locations continue to struggle in many
markets. “There are landlords that are still in tough situations with large
vacancies, but that is not where the active retailers are going to look today,”
and restaurants are accelerating store growth by expanding in existing markets
and entering new markets. Lincoln, Neb., for example, landed on the radar for
many national restaurant and retail chains after the city opened the Pinnacle
Bank Arena at the edge of downtown in 2013. “When we opened that arena, it
really put us on the map nationally, and we started getting a lot of
attention,” says Robin Eschliman, CCIM, president of Eschliman Commercial Real
Estate in Lincoln. The arena also has sparked ancillary development, including
restaurants and two hotels, as well as condos and apartments.
Lincoln, Chick-fil-A, Dunkin’ Donuts, Slim Chickens, H&M, Marshalls
HomeGoods, and Aldi have all opened new stores in 2014 or are set to open
stores this year. Many of those brands are new to the market. “We’re like a lot
of places. We have a very small amount of class A shopping center space or high
quality corners and pad sites for new drive-thru restaurants,” Eschliman says.
Most of the vacancies are concentrated in the older class C shopping centers or
areas of the city that have less attractive demographics and lower incomes.
the increase in retail activity has helped to revive a stalled retail project
located in the far southern part of Lincoln that has sat largely empty for
several years. The Wilderness Hills shopping center was built in 2009 next to a
Kohl’s store that was completed in 2008. Although the nearly 500,000-sf project
was ill-timed with the recession, the shopping center is now seeing fresh
interest. A Marshalls HomeGoods store and an Aldi grocery store opened there
last year, and there is more interest from retailers to lease space in that
center, Eschliman notes.
recently hitting the 1 million mark for population, Grand Rapids also is
getting more interest from national retailers new to the market such as Trader
Joe’s, Dave & Buster’s, and West Elm. On top of that, existing chains are
looking to expand their presence in the metro. “We’re seeing a lot of demand
for space, but unfortunately from a broker’s perspective, not enough space,”
Denton says. As a result, some of the older and empty space is starting to be
repurposed. In Grand Rapids, for example, a vacant Barnes & Noble store was
converted to a Dave & Buster’s, while a long vacant Ruby Tuesday’s was
razed to make way for a Trader Joe’s.
the pendulum is swinging back in favor of the landlord. “Our market has been
very active,” says Jorge Rodriguez, CCIM, director of central Florida retail at
Colliers International in Orlando. The Greater Orlando area was one of the
first Florida markets to recover, in large part because of a record number of
visitors to the region in the past few years. Last year, there were some 59
million visitors to Orlando.
restaurant space is almost non-existent. Boxes and junior boxes also have been
very active in Orlando, and large spaces between 20,000 sf and 40,000 sf are
extremely hard to find, Rodriguez says. Those spaces where there are more
options are often located in “transitioning” markets where tenants are leaving
the market for various reasons, such as a shift in the trade area or more
competition from newer centers, he adds.
supply of space shrinks, many landlords are offering fewer tenant improvement
dollars and pushing rents higher. During 2014, asking and effective rents for
neighborhood and community centers increased a modest 1.8 percent and 2.0
percent respectively, roughly the rate of inflation, according to Reis.
However, rent increases vary depending on the conditions within specific
markets, trade areas, and individual properties.
markets such as Orlando, rents have climbed into the $40s psf for space in new
developments, and Rodriguez is currently negotiating a lease for a national
fast casual chain where the rent is nearly $50 psf on a newly built location.
Even in 2006, during the competitive market prior to the recession, rents were only at about $40 psf, he adds.
supply of space shrinks, rents are trending higher, particularly for strong
locations, agrees Massey in Memphis. “We are starting to see some of the
highest rents ever quoted and actually signed in the Memphis market,” he says.
For example, Massey has done some deals that are north of $50 psf for new
construction — the highest level he has ever seen in his 14-year career.
biggest obstacle with lack of supply is that landlords of the better properties
are asking rents that are much higher than the market will bear out in the long
term,” Massey says. He doesn’t think the high rents are sustainable over the
long term for most tenants. “Many tenants will need to come back to renegotiate
their rents to a level that aligns with sales,” he says.
are finding that they need to be aggressive, move quickly, and even be willing
to think outside the box to find space in today’s competitive market. One
option is to buy out another tenant’s lease that is looking to close, or
contacting a landlord about a space before it is vacant. Maybe that existing
retailer is not healthy or is behind on rent, Rodriguez says. “There are ways
to get creative in the market to try to get good spots,” he says.
Mattson-Teig is a writer based in Minneapolis.
complaining about lack of real estate options may soon have some relief as the
development pipeline starts to expand. Statistically, construction remains well
below historical levels. Very few new centers are being built and most of the
construction that is occurring is in the form of expansions to existing
centers. New completions specific to neighborhood and community centers totaled
7 million square feet in 2014, according to Reis. That volume is less than 25
percent of the development that was occurring pre-recession when annual
completions reached 29.6 million sf in 2006 and 33.3 million sf in 2007.
Memphis, Tenn., the new supply that has come online during and after the
recession has been about 10 to 20 percent of pre-recession levels. “We have
gone through four or five years of no new development taking place, while
demand was building up,” says Shawn Massey, CCIM, CRW, CLS, a partner at the
Shopping Center Group in Memphis.
the queue of potential projects is growing. Late 2015 and 2016 should bring
some relief for Memphis area tenants with several new projects coming on line.
“Prior to 2015 I would say the actual rents were not high enough to justify new
construction. It is amazing how this has changed in the last few weeks,” Massey
many metros have seen a continued focus on retailer-driven projects. Bigger
retailers such as Ikea, Bass Pro Shops, Walmart, and grocers such as Trader
Joe’s are among those retailers who have continued to develop their own
locations. Urban redevelopment and in-fill projects have provided another
source of activity in recent years.
example, Overton Square in Memphis is a dining and entertainment project in
Midtown that was recently redeveloped after being dormant for about two decades.
The area has “sprung to life” and is now 100 percent occupied with tenants such
as Bar Louie and the Bayou Bar & Grill, Massey says. In March, a local
developer also announced a 100,000-sf retail center as part of mixed-use
development in Midtown that will include 300-plus apartment units.
Florida is another area that is experiencing a renaissance of new development.
The Crosslands is a 427,000-sf project under construction in Kissimmee, Fla. It
is the largest new retail project to be built in the Orlando metro in the last
five years. Retailers include Havertys, Hobby Lobby, PetSmart, Ross, and
Starbucks. Some stores began opening in fall 2014. “That is becoming a very
successful project on the leasing front,” says Jorge Rodriguez, CCIM, director
of central Florida retail, at Colliers International in Orlando.
higher rents and significant pre-leasing commitments to support shopping center
construction does remain a challenge for many metros. However, development is
slowly growing, spurred by the improving economy and strong demand for space.
“My expectation is that 2015 is going to be as good as 2014, if not better,”
Rodriguez says. “But, I hope that we get to see some other new development in
key markets, because things are getting really tight.”