Prime commercial real estate is hot and retailers will pay more for it
As if retailers didn’t have enough challenges with supply chain issues, recruiting and retaining staff and shoppers scared off by rising prices, they now have another worry. Prime commercial real estate is in high demand and rental rates are rising accordingly.
That’s good news for REITs and other retail property owners and managers, but bad news for retailers who have to factor rising house prices into their balance sheets. It’s the simple economic law of supply and demand.
Retailers are opening new stores much faster than they are closing them, creating an uphill battle for the best spaces. At the end of 2021, the National Retail Federation reported that major retailers headquartered in the United States announced more than 8,100 new store openings, more than double the 3,950 planned closings.
Until January 2022, a popular month for retailers to announce their opening and closing plans, the gap between the number of openings and closings is even wider – 1,190 openings for 742 closings, according to Coresight Research.
Simon Real Estate Groupthe largest owner of shopping centers in the United States, has just announced that its occupancy rate reached 93.3% at the end of March, against 90.9% last year.
On the earnings call, CEO David Simon said he had signed more than 900 leases for more than three million square feet during the quarter and added that there was “a significant number of leases in our pipeline”. Given its positive outlook, SPG also raised its previous guidance.
Demand exceeds supply
Real estate investment firm JLL Capital Markets just completed a study on retail real estate market trends and I caught up with Danny Finkle, JLL’s Capital Markets Co-Head of Retail and Managing Director from its Miami office to discuss the results.
“Retail follows consumers, rent growth follows both, and investors follow all three,” he said. “It all boils down to a dwindling supply with steady and growing user demand in the retail space.”
The reduction in supply is a low level of new retail development that is not expected to pick up any time soon due to the rising cost of construction and building materials. The large amount of existing square footage in malls, outdoor malls, and other spaces that have been reallocated to alternative uses adds another complication.
The growing demand for space is driven by the recognition by retailers that even with a strong e-commerce presence, they must maintain an equally strong physical presence. So even established retailers who may have reduced their existing store base are starting to open new stores again.
And digital-native B2C retailers are now shifting to physical retail, creating even greater competition for prime retail space.
The reduction in supply is the overall low level of new retail development which is unlikely to pick up any time soon with the cost of construction and building materials skyrocketing. The amount of existing square footage in malls, outdoor malls and others reallocated to alternative uses adds an additional complication.
where it’s hot
Eight markets top the list in terms of growth potential, according to JLL’s analysis:
· Nashville, showing more than 60% growth in rental rates since 2011;
· South Florida, up nearly 50%;
Austin and Tampa at 39%;
Denver at 37%; and
· Charlotte, Dallas-Fort Worth and Raleigh-Durham approximately 30%.
Among major cities, Chicago is an exception with significantly higher net burn rates than number two Washington, D.C., followed in order by Boston, Philadelphia, Los Angeles, San Francisco and New York at the bottom of the pack. .
“Retailers need to be where people are and while workers will eventually return to inner-city urban areas, right now we need to be careful about where people travel, as well as work. “, he explained.
where it is not
A recent analysis of census data conducted by Brooking The Institute showed a “disproportionate” decline in the size of the country’s 56 major metropolitan areas (defined as exceeding one million inhabitants). People are moving in droves to smaller metropolitan areas with even stronger growth to non-metro areas.
The biggest losers were New York, Los Angeles, San Francisco and Chicago in 2021 and Boston, Miami, Washington, DC, Seattle, Minneapolis-Saint Paul and Philadelphia all fell from growth over the 2019-20 period. down in 2020-2021. .
Retailers will need to stay alert to how the trend of full-time or increasingly part-time working from home is changing traffic patterns in inner cities across the country. They may also be able to grab attractive urban commercial space on the cheap in the meantime.
As for retailers looking to secure suburban retail space, Finkle says the market will remain highly competitive.
“If you look at the number of new commercial developments, it’s a tiny percentage, the lowest in 50 years. And the prospect of new development in the future is also remarkably dim. It’s hard to believe that someone is going to build a new mall closed in the near future.
“But people still want to go out and shop and retailers need to be there for them,” he concluded.