Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/128835
For neighborhood and community shopping center neig owners, it's a time for refection. Tough they haven't experienced the numerous headline-grabbing store closures plaguing big-box and mall owners, they are facing many changes in consumer behavior — and too few changes in fundamentals. Te vacancy rate for neighborhood and community shopping centers fell by a mere 30 basis points year over year to 10.7 percent at the Ask end of 2012, according to Reis. Asking rents increased only 0.5 percent du during the same period, from $18.98 p per square foot to $19.08 psf. "Vacancy will need to compress in a much more signifcant fashion r before rent growth breaks out of its rut," says Ryan Severino, a senior economist at Reis. However, retail dev development is at historic lows. Construction starts fell to 5 m million square feet in 4Q12, according to CoStar. And Severino expects that, without much conSeveri struction activity, even wea demand will push down vacancy weak rates and push up rents this year. "We are experiencing the new normal," says Shawn Massey, CCIM, partner with Te Sho Shopping Center Group in Memphis, Tenn. "With the lack of supply and good space, negotiations favor landlords these days. Tey're ab to pick and choose tenants based able on credit, experience, and other factors." One of those factors is the br brick-and-mortar tenant's ability to increas thrive even as consumers increasingly shop online. Shopping center owners are now considering onc unacceptable service tenants and once am traditional triple-net retailers, among others. But because the potential impa of Internet sales is still unclear — impact and a full economic recovery still only a dream — retail owners and investors are hedging their bets. Tey're taking a close look at their tenant mix and how their space is being utilized. And, in the process, they're changing the face of toda neighborhood and community today's shopping centers. Credit Counts Te basic formula for a successful shopping center tenant mix hasn't changed much since the market downturn. "Ideally, you would want some type of grocery tenant to bring in the everyday shopper, along with one or two fast-casual restaurants on end caps to bring in the frequency-of-visit customer," Massey says. Depending on the center's size, junior anchors such as ftness centers or pet supply stores may be appropriate, he adds. Te balance might consist of general retail and service tenants. But these days, owners and investors are less apt to take a risk on retail tenants. "Compositionally, anchor tenants tend to be better quality retailers, in terms of company strength," says Michael V. Pappagallo, chief operating ofcer of Kimco Realty, a real estate investment trust that owns and operates a portfolio of approximately 900 neighborhood and community shopping centers. Specialty retailers like Whole Foods and Fresh Market are also emerging as strong anchors, he says, particularly in neighborhood centers, while national apparel and pet supply companies are becoming more prevalent in community centers. For smaller spaces in these centers, owners prefer franchises vs. mom and pop stores, Pappagallo adds. "Owners and investors want national names in their center as perceived better credit to balance out their tenant mix," Massey explains. "A lower rent with national credit may actually have a greater value upon a sale." Te retail sector has improved enough that shopping center owners can put capital for retrofts and tenant improvements into these deals again. "Tat's critical in getting credit retail leases completed," says Jonathan E. Lindsey, CCIM, broker with Te Shopping Center Group in Birmingham, Ala. "When the world turned upside down, landlords weren't funding deals, and tenants were shy about expanding. But in the past two years we've seen great activity." Restaurants will account for 42 percent of new retail units in 2013, according to Chainlinks, with strong fast-casual tenants such as Five Guys and Chipotle leading the way. May | June | 2013 27