August 2016 — Retail Properties Quarterly —
Page 19
“The thing is, if they’re in good loca-
tions with good demographics, the
spaces will go,” said Susan Karsh,
managing director with Newmark
Grubb Knight Frank. “The more sec-
ondary locations are going to be more
problematic – but they always are, so
nothing is new.”
The State of Retail
While consumer demands change,
bankruptcies are inevitably part of the
retail environment. “The most recent
bankruptcy of Sports Authority was
only one company, not a string of
business failures due to a major mar-
ket disruption,” said Crosbie. “One-off
bankruptcies will inevitably happen in
any market and are a part of how an
industry grows.”
In fact, these current announce-
ments are not much different from
previous decades.
“Ten years ago, the concerns were
Blockbuster, Circuit City, Radio Shack,
Albertsons, etc.,” said Hendrickson.
“Today, we are encountering similar
concerns over Sports Authority, the
‘Amazon impact,’ the changing grocer
landscape, etc. The beauty of retail is
that the location is not generic and
the space is not a commodity. Retail
always reinvents itself and the lat-
est and greatest concepts will see
the fundamental strength of a space
or location. Investors are targeting
shopping centers with that long-term
vision.”
Two factors often blamed for today’s
changes go hand-in-hand: the inter-
net and millennials. Millennials – the
first generation to grow up with
online shopping – demand that retail-
ers provide value, convenience, sup-
port and an experience that motivates
them to visit the brick-and-mortar
location, said Crosbie. Retailers must
also provide consumers with support
for online sales.
Some sectors enjoy more insulation
from internet competition than oth-
ers and are doing well because of this.
The most insulated sectors include
entertainment, food and retailers
that sell unique products or products
that require physical interactions
before buying – for example, trying
on ski boots or sitting in a chair to
determine the level of comfort, said
Jenkins.
When retailers adapt to provide
consumers with unique experi-
ences, their real estate needs adapt
alongside. Retailers are displaying a
thoughtful mindset when considering
expansions, which requires landlords
to be more creative and flexible in
order to make deals, said Crosbie.
“We call it the ‘Recession Hang-
over,’” he said. “We see it as a good
thing for the overall market. Land-
lords and developers will just need to
understand what retailers want and
expect as they go out and evaluate
projects.”
Vacancies
While vacancies can be challeng-
ing, there are major opportunities for
landlords in this predicament.When
filling empty stores, landlords have
an opportunity to raise rents, increase
shopping center traffic and create a
greater experience for consumers.
Often during lease up, landlords
offer incentives and low rent to
anchors or department stores under
the assumption that the retailer will
bring traffic to the center. So if this
anchor tenant leaves, the landlord has
the opportunity to bring in another
tenant who could be a much better
rent payer, said Karsh.
Of all the vacant space, the Class
A product in desirable locations will
move quickest, often finding retailers
that can take the entire space. For the
largest vacant spaces – 50,000 sf or
bigger – Big R, Hobby Lobby, and Mur-
doch’s Ranch and Home Supply are
some of the most active, said Karsh.
Sports Authority, which had 600,000
sf spread out over 30 locations, is
looking at vacant boxes that average
about 30,000 sf, said Jenkins. “This is a
very manageable size store to release,”
she said. It is easier to subdivide a
30,000 sf store than it is to divide a
100,000 sf, and there are more 30,000-
sf tenants out there than larger ten-
ants. “So, for the most part, the releas-
ing of those stores may be an oppor-
tunity for both the retailer and the
landlords of those shopping center.”
In this 30,000-sf range, off-price
retailers, such as TJ Maxx and Ross,
are active, as are grocers, gyms, fur-
niture users, distribution retail and
some soft goods.
When landlords are determining
ideal prospective tenants to cultivate
or maintain a strong tenant mix in
their centers, sporting goods providers
stand to benefit from Sports Author-
ity vacancies because landlords know
they’d fit well in the desired tenant
mix.
Other box retailers that had been
unable to penetrate certain trade areas
will try to take advantage of the A and
B locations as well, said Crosbie.
For C product in less desirable loca-
tions, landlords may need to get cre-
ative. “That could mean an office user
or something that’s not just pure retail
– something that doesn’t need the
kind of traffic that the traditional box
national would take,” said Karsh.
We might begin to see retail in the
front and storage in the back, a “retail
mullet,” as Crosbie calls it. Or shopping
center developments may be scraped
for new mixed-use development,
which would be far more expensive
than repurposing the space.
The other option is dividing the
space for multiple tenants. Many land-
lords will hesitate to do this because
dividing boxes is expensive, said
Karsh. “They’ll divide it if they have to,
but sometimes I’ve seen landlords tell
the tenant to take the entire space at
a much lesser rent just so they didn’t
have to go through dividing it,” she
said.
However, every space is unique and
splitting a large vacant space can have
serious payoffs, said Jenkins.
“There’s always a cost of demising
the space, but smaller spaces dictate
larger rents,” Jenkins said. “So the
payback should be there. And tenants
are downsizing, so the more reason-
ably sized spaces you have, the easier
it’s going to be to release them in the
future. It’s really a long-term invest-
ment when you demise a space.”
s
Retail Trends
‘Ten years ago, the concerns were Blockbuster, Circuit
City, Radio Shack, Albertsons, etc. Today, we are
encountering similar concerns over Sports Authority, the
‘Amazon impact,’ the changing grocer landscape, etc.’
– Jon Hendrickson, Cushman & Wakefield
