“In this economy, developers need to be more flexible. At the same time, retailers need to be more inflexible,” says David Birnbrey, president of Atlanta-based Shopping Center Group/ChainLinks. Despite a national vacancy rate that has held steady in the mid-7% range during the slowdown, Birnbrey believes the retail world contains “a great deal of potential vacancy.” In addition, retailers have altered their rollout strategies.

Four years ago, retailers satisfied shareholders, private investors, and lenders by focusing on growth. This meant opening more stores — lots of them. Landlords flourished, demanding and receiving favorable lease terms.

Today, the pendulum has swung back. Retailers now favor quality over quantity, as their investors and lenders expect more in terms of same-store growth and profitable new locations. But developers must fill space and keep space filled. Hence, they have grown more inclined to bend in directions that will help less flexible retailers make commitments.

David Birnbrey, president
Shopping Center Group/ChainLinks, Atlanta
“Many big boxes self-develop their own sites, while the landlord owns the space around it. When the big-box anchor leaves, it could decide to sit on the site to prevent a competitor's entry into the market.”

Len Brumberg has noticed this trend. As executive vice president of retail with New York-based New Plan Excel, which specializes in neighborhood and community centers, Brumberg has seen retailers become more selective. “I think retailers have cut their open-to-buys a bit,” he says. “Certainly they are not as aggressive as they have been. And we have become more proactive in our efforts to maintain occupancy, especially in the terms under which we will do leases.”

Tenants take control

But the more developers bend, the more retailers expect. Suppose a retailer finds a good location in a center with a struggling movie theater, an old-fashioned grocery store and an antiquated drug store. According to Birnbrey, the retailer might take a deal if the developer offers a flexible rental rate, a more-than-reasonable term, and an attractive tenant improvement budget. But this retailer will also demand strict co-tenancy protection as a fallback position. If one of the anchors leaves, the retailer may have an option to leave or to pay one-quarter of the agreed-upon rent for 12 months and then leave if the anchor hasn't been replaced.

In the case of power centers, developers may face even more pressure. Power center leases often contain a co-tenancy requirement that specifies the box by name. “Sometimes the lease will say ‘Wal-Mart or a suitable replacement,’ but most of the time, it will identify the specific retailer that must be in the center,” Birnbrey says. “Another co-tenancy problem affects power centers. A co-tenancy requirement related to a retailer like Wal-Mart or Target involves a piece of the shopping center the landlord doesn't own. Many big boxes self-develop their own sites, while the landlord owns the space around it. When the big-box anchor leaves, it could decide to sit on the site to prevent a competitor's entry into the market. This is a problem the landlord has no ability to cure. But the landlord will still suffer the consequences.”

The up side for landlords

Depending on geography and type of center, not all of the trends in today's market weigh heavily on developers. In Chicago, for instance, vacancy rates have remained relatively stable, inching toward 10% from 9.8% last year, despite elevated levels of store closings, according to a recently issued Marcus & Millichap research report.

“Our leasing group has anticipated the arrival of a mature market, and we haven't seen the violent reaction characteristic of past slowdowns,” says Jeff Kuchman, CCIM, principal and director of tenant brokerage for Mid-America Real Estate Corp./ChainLinks in Chicago. “While vacancy rates have not been rising, we do perceive that fewer retailers are waiting to assume vacant space.”

Even so, Kuchman has not seen Chicago retailers making new demands. “The market hasn't topped out,” he says. “If rents are beginning to peak, they haven't stabilized to the point where they will start down, which is when retailers have more muscle.”

Jeff Kuchman principal
Mid-America Real Estate Corp./ChainLinks, Chicago
“We haven't seen the violent reaction characteristic of past slowdowns. While vacancy rates have been rising, we do perceive that fewer retailers are waiting to assume vacant space.”

Perhaps even more encouraging to landlords, especially owners of grocery-anchored centers, retailers that prefer space in neighborhood centers have drawn closer to food anchors as the economy has slowed. “In the past, these retailers may have taken locations in formats without a grocery anchor,” says Joe Edens, chairman and CEO of Edens & Avant, a Columbia, S.C.-based company that builds grocery-anchored “necessity retail” shopping centers. “Today, these retailers are returning to food-anchored centers.”

Perhaps even more interesting, Edens has noticed that several national retailers typically found in malls and community centers have begun nosing into neighborhood developments. About a half dozen Edens & Avant grocery-anchored centers currently host Old Navy stores, a traditional community center and mall tenant. According to Edens, negotiations are underway with Old Navy in relation to other grocery-anchored locations.

Edens also reports that other power center and lifestyle center retailers taking or looking at Edens & Avant space include Ross Dress For Less, Steinmart, Michael's Arts and Crafts, PETsMART, Talbots, and big-box booksellers.

While today's leasing trends are reactions to the slowing economy, Edens believes the movement of national retailers into neighborhood centers stems from a different cause. “These companies are not vacating malls or power centers,” he says. “They are adding stores. They see benefits in the co-tenancies of grocery-anchored centers.”

If Edens is right, this trend will likely persist when the economy turns around, perhaps transforming the balance that exists between neighborhood centers, community centers and regional malls.

Michael Fickes is a Baltimore-based writer.

U.S. retail market highlights

Atlanta: The most active leasing occurred in the 10,000- to 20,000-sq.-ft. unanchored strips in high-income pockets. Active retailers include Wal-Mart, Home Depot, Starbucks and Kohl's. Average in-line shop rent per sq. ft. was $15.50 and average junior anchor rent was $11.

Boston: Little vacancy exists downtown and rents are still strong. A number of tenants are searching for spaces of 1,500 to 3,000 sq. ft., including mobile phone providers and fast food operators. The suburban market remains very tight. Average in-line shop rent per sq. ft. was $25 and average junior anchor rent was $18.

Charlotte, N.C.: A wave of new retailers hitting the market include World Market, BJ Wholesale, Costco as well as several new furniture stores. Market conditions are expected to remain strong, fueled by population and housing growth. Average in-line shop rent per sq. ft. was $18 and average junior anchor rent was $14.

Reno, Nevada: The first quarter vacancy rate of 3.3% signals that the market remains healthy. Only 548,000 sq. ft. is under construction, all of it in the South Reno submarket. Asking rents for space in neighborhood centers are highest in West Reno, averaging $15.51 per sq. ft. versus $12.15 for the market. Average in-line shop rent per sq. ft. was $16.10 and average junior anchor rent was $14.28.

St. Louis: New retailers entering the market include 24 Hour Fitness, Bassett Furniture, O'Charley's and Red Robin. Seven centers containing nearly 2.8 million sq. ft. were completed in 2000, with additional development underway this year. Average in-line shop rent per sq. ft. was $17.50 and average junior anchor rent was $12.

San Antonio, Texas: New home sales continue at a record pace. Grocery stores and big boxes are staking their claims along Loop 1604, attracting smaller retailers in their wake. Lowe's entered the market, while Wal-Mart and Target are expanding their supercenter concepts. Average in-line shop rent per sq. ft. was $21 and average junior anchor rent was $16.
Source: Grubb & Ellis' Retail Market Trends, Summer 2001

Reverse English

Retail, like politics, remains a local business. National trends often break down in the face of local conditions. Take the Bay Area around San Francisco, for example.

According to Matt Kircher, CCIM, managing partner with Terranomics Retail Services, the Northern California affiliate of ChainLinks, vacancy rates across the region are hovering between 3% and 7%. So space is scarce and expensive, with retailers often lined up waiting for vacancies.

Odd as it might sound, Kircher suspects that the slowing economy might ignite retail leasing activity in the region. The reason: Industrial rents have been forcing retailers out of the market.

“We have triple-net industrial rents here that are higher than most retail rents,” Kircher says. “I recently had a big-box deal blow up because of an industrial tenant willing to pay more for the space.”

The area's high-tech economy has hit the skids in the past 12 months, a trend that has begun to lower land prices and loosen up the property market for retailers.

“As long as consumer confidence stays relatively decent, I think retailers will want to expand in the Bay Area market,” Kircher says. “As the economy here slows down, retailers will see space opportunities that they haven't had for a while.”

California. Go figure.
— Michael Fickes