Shopping center owners have found themselves in a completely unfamiliar situation: for the first time in 20 years, demand for retail space exceeds supply.
That demand has skyrocketed recently, and after years of quiet construction and a purge of underperforming properties, it found itself with a retail market with less available space. Properties that survived the purge hired tenants that would attract more buyers and give them more reasons to stay. That 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 weren’t doing as well, such as bookstores and clothing brands.
Because of those measures, “there aren’t as many tenant layoffs, and landlords are creating much stronger tenant mixes,” said Barrie Scardina, president of retail services, agency leasing and alliances for the Americas at Cushman & Wakefield, a retail firm. real estate. “We are seeing one of the most productive occupations recorded in the last 10 years.”
Shopping center vacancies are the lowest in two decades, at 5.4 percent, Cushman & Wakefield said in a recent report, and the advantage in lease negotiations has shifted from tenants to landlords.
To meet demand, developers are looking for distressed and failing properties, or even locations where retail would be a better fit 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 shift from what the developer was doing just a few years ago, when it was selling off much of its shopping center portfolio and pivoting toward industrial buildings that house tenants such as logistics providers, said Bobby Khorshidi, president of the firm.
Partners Capital’s move is an apt representation of how the fates 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 had been “good for retail.” “
“There was a lot of abandoned space converted to other uses, and over-debt retailers who had been hanging on by their hands were weeded out,” he said.
While the pandemic may have accelerated the rebound, it is underpinned by a shift that began more than a decade ago. After the financial crisis and recession of 2009, and amid the growth of e-commerce, retail bankruptcies led to a glut of space that led many investors to sell or convert shopping centers and adopt offices, apartments and warehouses. Mall space, which had increased between 2006 and 2009, began to shrink, primarily in two waves, first from 2009 to 2016 and then again during the pandemic.
Shopping centers that still existed shifted gears to meet changing consumer tastes, and landlords brought in high-traffic tenants, including restaurants and entertainment centers, fitness center operators, boutique services, public gathering areas, and medical facilities.
In some cases, developers are adding apartments, grocery stores, hotels and offices, while reducing excess retail space.
Trademark Property plans to redevelop a 470,000-square-foot center in Arlington, Texas, reducing commercial space by about half and adding office, residential, hospitality and entertainment uses.
Similarly, Shopoff Realty Investments plans to convert a Macy’s and a vacant Sears that tops 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 commercial properties. It typically reduces retail space by 60 to 90 percent, said Bill Shopoff, founder of the Irvine, California-based company.
“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. Luxury shopping centers also have a shortage of vacancies, she added.
The industry has also seen an uptick in demand in recent years as in-person shopping enjoyed 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 nearly 4 percent higher than a year ago. In some cases, landlords can increase rates on new leases by more than 30 percent over the previous contract, said Terry Montesi, founder of Trademark Property, a developer of retail and mixed-use properties in Fort Worth.
The current environment is reviving investor interest. As commercial properties fell out of favor, their values generally have not increased as much as those of apartments and warehouses in recent years. As a result, shopping centers can generate attractive returns compared to those more expensive assets in a time of persistently high interest rates.
“The fundamentals of retail real estate are the strongest they have been in my career,” said Montesi, who founded Trademark in 1992. “Capital markets have not fully adapted to retail, but they are warming up.”
But a handful of threats could derail the good times. Most notably, industry experts say, consumers are feeling pressured by inflation and have reduced discretionary spending, as recently reported in Walmart and Target’s quarterly earnings. Mall owners and retailers alike are pressured by higher interest rates as well as the rising cost of construction and insurance, all of which is driving up occupancy expenses.
Investors are also keeping an eye on troubled retailers, as more clothing stores like Express and Rue21 file for bankruptcy and major retailers like Macy’s and Walmart close underperforming locations.
Meanwhile, shopping centers look better than they have in a long time, and vacant spaces are often quickly occupied by other tenants.
During the pandemic, developer NewMark Merrill secured pre-leasing commitments for 100 percent of its Rialto Village project, a 96,000-square-foot center that opened last year in California’s Inland Empire region, said Sanford Sigal, the group’s chief executive. . A decade ago, pre-lease commitments typically took up 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 mall business, people would say, ‘Oh, poor thing!’” said Sigal, who bought four malls in Chicago for approximately $100 million this year. “So the idea of receiving calls from brokers the day after a store announces its closure is very unusual. “Maybe we are the cockroaches of the Earth’s extinction event.”