Occupancy rates throughout the retail real estate industry have ticked up in recent months, leaving the sector on its best footing since before the pandemic.
Retail properties of all types, from grocery-anchored centers to enclosed super regional malls, have experienced a burst of leasing activity over the past 12 to 18 months. And even the most pessimistic real estate experts contend that the deal flow reflects the retail industry’s recovery.
Preliminary data for the first quarter indicates that retail tenants absorbed 91 million sq. ft. nationally during the prior year-long period, according to Marcus & Millichap. The real estate firm says March 2021 to March 2022 was the strongest 12-month span in terms of absorption in nearly five years.
“There’s just not enough vacant retail space,” says Drew Barkett, executive vice president of DeBartolo Development. “It’s becoming a bidding war out there.”
DeBartolo currently owns two vastly different retail properties: Ka Makana Ali’i, an 859,000-sq.-ft. regional shopping center in Kapolei, Hawaii, on the island of Oahu, and Seven Oak Plaza, a 78,0000-sq.-ft. neighborhood center in Wesley Chapel, Fla., outside of Tampa.
“Ka Makana Ali’i is just crushing it,” Barkett says, adding the center is more focused on daily needs and year-round residents instead of relying exclusively on tourism. Anchored by Foodland Farms and 24 Hours Fitness, the project offers more than 120 shops and restaurants, along with a theater, lifestyle center, and a limited-service hotel.
Ka Makana Ali’i’s leasing is handled by JLL’s Retail Agency Leasing Group, which saw leasing activity increase by more than 600 percent across its 80-center portfolio from 2019 to 2021. Last year, the 25-person team secured nearly 200 new deals across all center types and classes of properties.
“The leasing activity that our team is seeing signals a larger retail recovery,” says Paul Chase, executive vice president of retail agency leasing for JLL. “Retailers have gotten smarter throughout the pandemic.”
The firm’s fourth quarter 2021 United States Retail Outlook reports an increase in occupied retail space totaling 76.1 million sq. ft., a meaningful reversal from the negative 28 million sq. ft. posted in 2020.
“Retail leasing activity is incredibly strong at our properties,” says Daniel Goldware, senior vice president of leasing for Trademark Property Company, which owns 17 mixed-use properties totaling about 10.7 million sq. ft. across the country including the high-profile Galleria Dallas and First Street Napa. “The pandemic proved that the physical store is more valuable than ever.”
In a recent McKinsey & Co. poll, senior executives from 10 of the largest North American retailers said they had experienced significantly higher e-commerce growth in sales areas with a physical presence compared to those without any brick-and-mortar stores. Additional research from McKinsey indicates that 60 to 70 percent of consumers across categories research and shopping both in stores and online.
Store-based retail sales, which excludes online purchases and spending at restaurants and bars, represented nearly two-thirds of all retail sales in March, the largest proportion this year, according to Marcus & Millichap. The firm says the 2.1 percent rise in store-based spending recorded last month suggests a rise in foot traffic in physical stores as health conditions improve and mandates are lifted.
“People want to be out and about,” says DeBartolo’s Barkett. “They want to see and touch items in the store. They want to enjoy dinner out with friends and family.”
Data provides more certainty
Retail tenants today are approaching leasing differently than they did pre-pandemic. Instead of blanketing a market with dozens of new stores, these companies are relying on data to help guide their leasing decisions. This more methodical approach means fewer, more targeted stores that cater to their shopper demographic. The sector has also been helped by high demand from health and wellness tenants for traditional retail locations.
“Tenants now have access to data that tells them which locations are going to be good for them and which locations are not,” says Sandy Sigal, chairman, president and CEO of Woodland Hills, Calif.-based NewMark Merrill Companies, which owns and manages more than 10 million sq. ft. of retail assets in 85 cities. “This certainty has made them more confident in making leasing decisions. Last year was a record leasing year for us, and this year will be another record year.”
Over the past 12 months, more stores have opened than closed, according to CBRE. In fact, after 70 retailers declared bankruptcy in 2020, the retail sector is now seeing the lowest levels of bankruptcy filings in the past five years.
Of NewMark Merrill’s 2,000 or so tenants, the firm lost 60 during the pandemic, or roughly 3 percent. “What does that tell you about retail tenants and their unbelievable hustle to adapt and survive?” Sigal says. “Frankly, I’m shocked at how good of entrepreneurs they are.”
Rental spreads widen
For retailers and restaurants that were already struggling prior the pandemic, COVID-19 was the proverbial straw that broke the camel’s back. Sigal estimates that at least half of the tenants that left his properties would have closed regardless of COVID-19.
Most landlords view this “culling” as a positive. They’ve been able to fill their centers with new, stronger tenants and deals leases at higher rental rates than previous leases.
Consider Phillips Edison & Company Inc.: the Cincinnati-based REIT’s portfolio, which consists of 268 properties totaling roughly 30.7 million sq. ft. across 31 states, reached record occupancy at the end of the 2021, according to financial filings.
PECO’s leased portfolio occupancy increased to 96.3 percent at year-end 2021, compared to 94.7 percent at year-end 2020. The REIT saw occupancy tighten for both anchor and inline space: anchor occupancy totaled 98.1 percent compared to 97.6 percent for the same period, while inline occupancy totaled 92.7 percent versus 88.9 percent.
In 2021, PECO executed 1,135 leases (new, renewal, and options) totaling about 5.6 million sq. ft. In comparison, it inked 861 leases executed totaling roughly 4.7 million sq. ft during 2020.
PECO saw its rent spreads increase significantly in 2021. New leases jumped 15.7 percent, while renewals were up by 8.1 percent for renewal leases (excluding options). Combined, new and renewal leases increased 10.1 percent.
“As an owner of grocer-anchored retail centers, we’ve come through COVID better than we expected,” says Ron Meyers, PECO’s senior vice president of leasing. “We’re seeing high demand from a wide variety of tenants and uses. Medical tenants and restaurant operators are particularly active.”
Source: “Does Increased Leasing Activity Signal Recovery for Retail Sector?“
