After several years of concentrating on portfolio consolidation, retailers are coming back to the negotiating table ready to talk new deals, according to leasing brokers, property managers and landlords. What’s more, growth is coming from a variety of sectors, including dining, specialty apparel and department stores, which means that the recovery that up till now has been occurring on a selective basis is starting to become market-wide.
One of the most encouraging signs for the industry is that the era of massive big-box vacancies appears to be over, according to Thomas W. Gilmore, executive vice president with Los Angeles-based Madison Marquette. Chains including Ulta, Five Below, TJ Maxx, Ross Dress for Less, REI and Whole Foods have been snapping up those spaces.
At the same time, healthy growth in categories including dining and entertainment is driving in-line leasing.
In fact, landlords at high quality, well-located shopping centers no longer have to give in to tenants when it comes to rents, says Matthew K. Harding, president and COO of Levin Management Corp., a third-party property manager. At those centers, the power equilibrium has returned to leasing negotiations. In the strongest markets in the country, landlords are even able to push rents.
In Walnut Creek, Calif., for example, the retail vacancy rate is now just 2.5 percent and rents are high enough that developers can justify building new properties, according to John Sechser, senior vice president and director of retail properties with Transwestern.
“The activity is demographic driven,” he says. “Walmart and Target are still expanding. And there’s also activity from theater, entertainment and dining.”
That momentum is likely to continue, according to Andrew Graiser, co-president of AG Realty Partners, a Melville, N.Y.-based retail real estate investment firm. One good sign that retailers are seriously looking at expansion is that a lot more retail CEOs and CFOs are attending this year’s RECon than in the past. The C-level executives have become much more involved in real estate decisions since the downturn and they are here to evaluate whether new store opportunities make sense.
Charles Wetzel, CEO of Buxton, a site selection consulting firm, says that retailers are trying to gain a better understanding of their customers and that real estate, marketing and merchandising departments are increasingly interacting in order to make the best decisions on store openings. Many of those store openings won’t occur until 2014, but the good news is they are in the works, according to Matt Winn, U.S. retail services leader with Cushman & Wakefield.
“We are beyond busy,” he says. “My appointment slots were double and triple-booked, which I haven’t seen in five years.”
Small worries
The one segment of the market that’s still causing property owners worry is small shop space, notes Graiser.
One part of the problem is that the typical mall in-line tenants like the Gap, American Eagle and Abercrombie & Fitch have curtailed their domestic growth in favor of international expansion, according to Joseph J. Boehm, III, executive vice president of retail leasing with Forest City. Those brands might still sign new leases with the biggest U.S. landlords at the best U.S. centers, but they might not be doing much business with the smaller operators.
At the same time, it remains a challenging market for independent retail operators to open new stores because of the difficulty of getting financing. Landlords have been trying to fill those holes in their properties with non-traditional tenants, including yoga studios, spas and other specialty services providers. But rents on small shop space are still way down from 2007 levels, says Gilmore.
“Across the board, we probably saw a 20 percent drop in rents from 2008 through 2012,” he notes. In small shop space, the market “probably gained back 10 percent of that.”