The mood at ICSC’s RECon has been near exuberant.
The industry is the most bullish it has been since the Great Recession began with many attendees feeling relieved that the “light of the end of the tunnel” that many talked about last year did not end up being a train. Instead, it really was daylight. And the result is a climate in which deals are actually getting done.
It’s still far from being a normal dealmaking environment. But at least attendees think things are clearly moving in the right direction.
The biggest challenge in the market is the difference in performance between top assets and those lower down in the value chain. The consensus in the market is that if you operate class-A space, you’re in pretty good shape. Those are the locations retailers want and those are the deals that are getting done.
The sentiment on class-B and class-C space is not as clear, however. Some attendees Retail Traffic spoke with said that tenants are beginning to look at those properties while others said that the market remains dead. However, even those that reported that retailers are looking at lower-quality space said that it remains to be seen whether any real deals will materialize from the recent inquiries.
“Tenants are more aggressive, but still nervous about class-B assets,” said Bill Taubman, COO of Bloomfield Hills, Mich.-based regional mall REIT Taubman Centers.
“There’s a flight to quality,” added Michael Glimcher, chairman and CEO of Glimcher Realty Trust, a Columbus, Ohio-based regional mall REIT. “The highest quality retailers are more demanding and are much more interested in class-A properties.”
Besides class-A shopping centers, retailers also are aggressively trying to grab urban locations. Rents on some of the country’s highest profile retail corridors—Madison Ave. in New York, the Miracle Mile in Chicago and Rodeo Drive in Beverly Hills—have surged in the past 18 months, according to several executives with global real estate service firm Newmark Knight Frank.
“Retailers want an urban footprint,” said Cynthia Groves, senior managing director, retail consulting. “Urban cores are hot and exceedingly competitive,” added Gregory Kirsch, a principal in the firm’s retail group. Kirsch estimates that rents have escalated between 30 percent and 50 percent in urban retail cores in markets like New York, Boston, San Francisco, Chicago and New York.
Still looking for help
While the market is improving, the balance of power in leasing negotiations unquestionably still lies with tenants. Activity is picking up, but vacancy rates at retail properties remain at or near historic highs, depending on whose numbers you look at.
So while the era of mass concessions is over, some tenants still need help, according to Matthew Bordwin, co-president of GA Keen Realty Advisors.
The firm renegotiated 7,500 leases in the last two-and-a-half years. Bordwin expects renegotiations to remain a big theme for the next couple of years. Some retailers that got concessions in the past couple of years may need additional support. For example, when landlords granted rent reductions, in many cases they were for 18 months. Those periods are now ending, but some retailers still need help. So those are the kinds of conversations that will continue to take place, according to Bordwin.
Retailers are also asking for things like kick-out clauses, periods of free rent and large tenant improvement (TI) allowances in negotiations. (Although, in some cases, lenders are pressuring landlords not to be too generous on the TI front.
Another challenge for the market is dealing with big-box vacancies, especially as many key players are developing smaller concepts.
“That’s not just being driven by e-commerce, but it’s a factor,” said Greg Maloney, president and CEO of Jones Lang LaSalle Retail, an Atlanta-based third party management firm. Many big-box retailers were just too large and need less space in a changed consumer environment. That too is contributing to the drive for smaller spaces, Maloney said.