Archives for May 2023

In the face of inflation, longer deal times, a possible coming recession, and predictably unpredictable changes in consumer tastes, making retail work in development and redesign is a challenge. That doesn’t make it any less necessary.

Adrienne Crawford and Lily H. Heimburger with SRS Real Estate Partners have worked with property owners for more than 20 years on the strategic redevelopment and repositioning of assets, as well as merchandising and leasing new developments.  Crawford and Heimburger report that owners, operators and developers can create successful projects if they focus on two key points: precise planning and the right priorities in design.

Planning Must Be Smart and Detailed

Supply chain issues remain a significant concern, “not only for goods, but also for construction,” says Heimburger, SVP and principal at SRS. Labor is tight everywhere, from construction to retail staffing, especially in hospitality. “Atlanta’s top restaurants can definitely find and retain talent, but everyone else is still having trouble,” and that can create hesitation to expand.

With financing expensive and construction slow, “deals are taking a lot longer to get done,” according to Crawford, another SRS SVP and principal. A buildout for, say, a restaurant used to run about 180 days. Now it’s 240 and the costs are much higher.

Because the stakes are high, the right details are critical. “Developers are putting a lot more thought into site design, trying to make sure everything makes sense before signing leases,” Crawford says. That includes everything from making developments more pedestrian friendly and adding public spaces for events to thinking through logistics like food delivery pick-up and how a restaurant’s back of house will function.

Looking at the world through tenants’ eyes is also important. “Because of the fear of a recession and high cost of supplies, tenant allowance is winning prospects,” Heimburger says.

Location is always important but not enough by itself. “Having a great location at Main and Main certainly helps,” says Crawford “But you also need a unique tenant mix to make it successful.” Existing projects must constantly adapt to changing tastes.

Design: Eye-Catching, but Also Practical

Many restaurants—and patrons—want the option for outdoor seating.  Crawford and Heimburger recommend allowing abundant room for parking (bicycles as well as cars), using breezeways to create foot traffic flow, blending shops so that anchors and 1,800 square-foot tenants share spaces along with entertainment and personal services. Creating a mix of national, regional and hyperlocal brands also helps create extra attraction.

“Make it more of an experience,” Heimburger says. “Include a mural or a living wall or something customers really want to make people remember it. Also make sure you’ve thought about the logistics for the end users: service corridors and dumpsters in the right locations. In a mixed-use project, place grease traps where they can be cleaned regularly.”

In Atlanta, Crawford and Heimburger advised on the redevelopment of The Krog District, a mixed-use collection of restaurants, retail and gathering spaces adjacent to the Atlanta BeltLine Eastside Trail, a 22-mile loop of multi-use trails connecting 45 intown neighborhoods. .

“It’s the only part of the BeltLine that has dual-facing retail,” Heimburger says.

At Atlanta’s Midtown Promenade, another redeveloped retail destination anchored by Trader Joe’s, the owner reconfigured the retail hub to provide direct access to one of the BeltLine’s most trafficked sections. The creation of a breezeway with interior fronting retail spaces completely transformed the project, Crawford says. The shops of Midtown Promenade previously faced away from the BeltLine toward the parking lot. The addition of a new plaza with stairs and landscaping have made the shopping center more inviting and accessible to pedestrians.

Some advanced planning, and best practices, can turn a new or rehabbed retail development into something special, creating a sense of place that is relevant, memorable and one that offers an experience that keeps customers coming back.

Source: “Key Drivers of Successful Urban Retail Redevelopments“

Data from two separate reports come to different conclusions about whether the national apartment market has shifted to a tenant one or remains in control of landlords.

In one, Redfin points out the rising vacancies landlords are facing as completed residential projects in buildings with five or more units rose 60% year over year on a seasonally-adjusted basis to 484,000 in March.

Another report, by researchers at the Florida Atlantic University, found that Stockton, Calif., was the only metro area in the country’s 100 largest to offer a rental discount, with renters in all other major markets paying a premium for their housing. It found that the average monthly rent in Stockton was about $2,397, just below the $2,400 that the average renter should be paying, based on historical trends.

Let’s dissect.

Redfin’s latest results put the rental vacancy rate at 6.4% in the first quarter, the highest in two years. It also notes that there have been only three other instances when completions were higher, which occurred in the 1980s. “The balance of power in the rental market is tipping back in tenants’ favor as supply catches up with demand,” Taylor Marr, Redfin’s Deputy Chief Economist, said in prepared comments. “That’s easing affordability challenges and giving renters a little wiggle room to negotiate in some areas. Marr also said the scales could tip back in favor of landlords if homebuilders put the brakes on new construction in response to slowing rent growth.

In addition, tenants are staying put, which is further promoting the recent rent deceleration, Redfin said, a trend also seen in the housing market. Why move when there’s economic uncertainty, along with slowing household formation, still-high rental costs and rising prices for other goods and services due to inflation? The Sun Belt saw the biggest declines in rent, which let some renters sign leases at better rates than they did a year ago.

The Florida Atlantic University College of Business agrees there is a slowdown in rent increases, but that this slowdown is occurring most in four north-central and western markets. Annual rent premiums, for example, remain elevated in South and Southwest Florida and while more supply in the months and years ahead will help ease the rent crunch in Florida, “the state’s popularity as a destination means renters and buyers aren’t likely to find many housing discounts,” says researcher Shelton Weeks, of Florida Gulf Coast University, in prepared statements.

But the research also found that premiums were below 1% in multiple cities, such as in Minneapolis (.20%), Las Vegas (.67%) and San Francisco (.85%). The researchers concluded that landlords still have the upper hand in most areas.

Source: Do We Have an Apartment Tenants or Landlord Market Now? Reports Differ

As the economy shifts and dynamics in business needs alter, so do results for commercial real estate. One recent analysis compared office with industrial as a second added more information on office.

Both are softening, but for different reasons, and the prospects for office are worse, as anyone in the industry might guess given the abundance of information and analysis that have already come out.

According to Colliers, while both industrial and office sales have been softening, the former has been stronger than the latter in 13 of the last 15 quarters. “Prior to that, industrial had never topped office in any quarter, per data from MSCI. Office is in the headlines of late, and much of the press is negative, creating a tremendous opportunity for risk capital willing to deploy.”

Vacancies of both will likely increase in 2023, but industrial has softened because of more inventory coming online and occupancies are still robust, with gains in the recent quarter well above pre-pandemic levels. Rents have also seen growth in industrial, up 27% over 12 months. The rent growth will slow with increased supply.

At the end of the first quarter, office vacancies at 16.1% were 20 basis points short of  the record level. The difference is that office has fallen off because of demand, not increased supply. Asking rents have held at high levels, but tenants are claiming significant concessions, including rent and communications packages, so effective rents are dropping.

From Transwestern comes an additional view of office. Delinquency rates are on the rise, from 1.6% at the end of 2022 to 2.9% at the end of the first quarter of 2023. Net absorption was negative in direct lease and sublet space, “with only 14% of markets managing positive net absorption for both the quarter and the trailing 12-months.”

Transwestern showed a different vacancy rate for office of 13.4% (a product of different data sources) than Colliers, but that was up 50 basis points in the first quarter. The average asking rent of $26.27 in Q1 showed 1.4% year-over-year growth, which is a deceleration of trends.

One potential reason for the results according to Transwestern were the quarterly job cuts in information, finance, and employment services, all heavy users of office space. “Despite rising 18.2% in March 2023, office-using job postings (companies looking to hire) are down 33.6% YoY as companies pulled back on hiring in the face of inflation and higher interest rates,” the firm wrote.

Meanwhile, Transwestern’s look at industrial showed vacancy rates of 4.2%—above 4% for the first time since 2021 but still below the 20-year average of 7%. Asking rents of $8.45 show record quarterly and annual growth. A 50% or more drop of construction starts will help strengthen rents.

Source: “Industrial and Office Both Slow, But for Very Different Reasons“

LAS VEGAS—The impact of bankruptcies is going to be a prominent topic on the show floor at this year’s ICSC Las Vegas event, “partly because it frees up some 1,400 spaces in 2023.” That is according to Jason Baker, principal of Houston-based Baker Katz, who chatted with GlobeSt.com about the upcoming event. “This creates a lot of opportunity for new or established retailers to expand.”

When queried about his expectations for the upcoming ICSC event, Baker expressed his enthusiasm for the ongoing discussions concerning how the current economic landscape is influencing retailer expansion and new development. He commented that he is intrigued to observe which projects will come to fruition and which will not, as well as which retailers will continue to expand despite the economic challenges. Additionally, he expressed an interest in learning how industry leaders are navigating the current situation and seizing opportunities in the upcoming months.

His primary objective for this year’s event is to support national and regional brands seeking to expand into South and Southeast Texas. He mentioned that his team has been inventive in generating novel prospects regularly despite a market that is already heavily saturated. He added that they are eager to maintain their momentum and engage with new and existing clients who are considering Texas as their next expansion destination.

Source: “Bankruptcies and Retailer Expansion Expected to Take Center Stage at ICSC Event“