By Adam Ifshin, CEO, DLC Management Corp.
The open-air retail center sector remains strong. It’s just that it’s not your father’s or mother’s kind of retail anymore. While rents are steadily moving upward, we’re seeing different types of tenants at our centers. There is a growing number of special service providers such as OrangeTheory Fitness and Aspen Dental and fewer traditional retailers such as Payless or Bed Bath and Beyond. Here are three big trends we are seeing in leasing.
Higher rents from smaller spaces. In 2019, DLC Management will be up 15% to 20% from last year in the amount of rent generated by new leasing activity. While deal counts are relatively flat, we see a great amount of that activity taking place in the under 10,000 sq. ft. range. Most chains going bankrupt and disappearing are those with larger retail footprints. Entering our centers, meanwhile, are brands like Chipotle, Starbucks, WellNow Urgent Care, and Club Pilates that operate within smaller formats.
That’s not to say that larger format stores are going away. We signed multiple deals with Ross Dress for Less, Burlington, LA Fitness, and HomeGoods this year. Retail real estate is a bifurcated marketplace. You have the big guys and the little guys simultaneously driving rents these days. The commonalities are value and wellness.
The trend of lease re-negotiation toward shorter durations has pretty much played out and settled down. Instead, larger-format chains are signing 10-year leases while smaller-format chains are entering five-year leases with options. As a landlord, we prefer 10-year over five-year, but we are still doing some 15- and 20-year leases in cases where we’re executing full-scale buildouts. In non-traditional uses like fitness and medical, longer lease terms are typical.
Tenants want turnkey installations. One of the main reasons that tenants are paying higher rents is that they want you to build the space for them and construction costs are soaring.
It used to be the case that if we bought a shopping center with a vacant box, there was no way that we weren’t going to make a profit leasing that empty box. Today, however, there are scenarios in which developers don’t make money on that box even if they didn’t pay anything for it in a deal. For example, if we buy a vacant box at a market cap rate and spend $100 per sq. ft. for renovation, it will be a struggle to generate $10 net per sq. ft. As such, there’s no reason to lease the box in certain markets. Vacancy continues to drive value creation, but it’s not universal. Selectivity is key.
Our costs depend on what tenants want and their needs vary greatly. If a tenant wants the lowest rent possible, a landlord may spend only $20 per sq. ft. on a buildout. On the other end of the spectrum, if a tenant wants to turn the old Kmart into a supermarket or a Dick’s Sporting Goods, it’s likely to be in the $100 to $130 per sq.ft. range. Furthermore, those costs are trending upward due to the shortage of construction labor and tariffs on imported materials. If a developer is going to invest that money in a buildout and not generate $10 to $14 in average net rent, there’s no money to be made.
Retail real estate is a bifurcated marketplace. You have the big guys and the little guys simultaneously driving rents these days. The commonalities are value and wellness.
Changing the tenant mix. As of October this year, DLC had executed 66 new leases for properties under 5000 sq. ft.—and not one of them was for an apparel brand!
Smaller apparel shops are migrating away from our open-air centers. The days of us going out and doing a portfolio review with Dress Barn, Ann Taylor, or rue21 are practically over as consumers nowadays shop for apparel at value oriented-retailers such as Burlington, Marshalls, and T. J. Maxx.
A new wave of tenants who provide experiential retailing or specialized services has moved into our open-air centers. For instance, our spaces have been filled by the urgent care clinic or healthy chain restaurants that can generate in excess of $400 a square foot in sales and can afford to pay higher rent. To name a few, LA Fitness, Aspen Dental, Chipotle, and Verizon are the types of retail businesses that continue to bring consumers to our centers. Tenants that create traffic and dwell time, regardless of their use, continue to be a focus at DLC.
Agility and adaptability are becoming crucial to the success of our business. We have been working hard to strike the right balance between what consumers want and what tenants need to succeed. At the end of the day, it’s all about making retail places better for all.
Source: Chain Store Age Magazine
