December 10, 2009

Retail’s bumpy ride starts to smooth out

  • There are signs of improvement, but it may take more time to get back to a vibrant demand-side retail market.
    CB Richard Ellis


    It’s a bumpy ride for retail property owners. Although the outlook for retail leasing is showing signs of improvement, getting retailers to commit to new leases is not easy.

    Given the lack of available credit and the weak relative outlook for consumer spending in the immediate future, retailers are being very careful with their money. Landlords are compromising on their terms in order to get leases signed. Difficult decisions are being made about the benefits of filling up vacant space versus holding out for terms that make the most financial sense.

    Competition is stiff for landlords courting national tenants. Expanding national retailers often have multiple times more opportunities now than they have in prior years due to the increased number of vacancies resulting from tenant closures.

    Markets can lose their significance as tenants have greater opportunities nationwide. Not only are property owners in the Puget Sound area competing with the rest of the country, in many cases they are competing globally as retailers find expansion prospects fertile overseas.

    Regional tenants step up

    Categories of national tenants expanding in the Puget Sound area include sporting goods, value-apparel, fitness, neighborhood hardware, pet supply, value-grocer and quick-service restaurants. Big box retailers are frequently expecting rents in the low teens per square foot (yearly, triple net), plus a hefty tenant-improvement allowance. Rents in the mid-$20 range plus a generous tenant improvement allowance, depending on delivery condition, are common for transactions involving restaurants in the 3,000- to 4,000-square-foot range.

    Certain regional tenants, many of whom are franchisees, are in the market looking for new store locations. Previously forced to stand in line behind national tenants when competing for quality retail space, they are now the “belles of the ball” to many property owners.

    Although they are willing, many regional tenants are unable to complete leases due to the limited availability of financing. Lenders are encouraging retailers to apply for SBA loans but tenants report that the approval of new loans continues to be low.

    The challenging lending conditions have required landlords to significantly improve the premise delivery condition and tenant-improvement dollars to make up for the lack of financing. This comes on top of rents that have been lowered 10 percent to 25 percent, requests for free rent and, in some cases, negotiated early termination provisions and more lenient personal guarantees.

    Photo courtesy of Northwest Retail Partners
    One of the retailers opening new stores locally is LA Fitness. This store opened last year at The Landing development in Renton. LA Fitness now has 17 stores in Western Washington.

    Psychological changes

    After a year of economic uncertainty, the retail landscape has changed significantly, forcing retailers to rethink their strategy. Many industry experts believe the downturn has created a profound overall shift in shoppers’ psychology. People are saving more and spending less. Consumers are more conservative and better informed. In order to survive, retailers are stepping up their game to offer value in terms of service, shopping experience and unique merchandise in addition to price.

    While carefully controlling inventory, retailers are working to broaden their offerings, co-branding, adding new product categories and opening in-store boutiques to create one-stop shopping environments and keep consumers under one roof. Many are expanding their Internet-based marketing efforts. Promotional advertising using social networking Internet sites, such as Twitter and Facebook, and mobile technology using smartphones, is becoming extremely popular as a dynamic way to communicate with shoppers using special coupons and exclusive shopping opportunities for members.

    What’s coming

    New store expansion, in many cases, has been put on hold as retailers invest capital in existing store remodels instead.

    Those with a continued appetite for new real estate are moving forward cautiously. Many retailers are re-examining store size and reducing square footage requirements to lower overhead. Smaller-format stores also give larger retailers the advantage to move more aggressively into tight urban metropolitan areas.

    Looking toward 2010, industry insiders predict:

    • Luxury goods will continue to be hard hit while value retailers will thrive. However, Nordstrom and Sak’s both reported positive same-store sales in the last quarter and project that affluent consumers may be starting to increase their discretionary spending.

    • Growing ethnic diversification will provide a strong market catering to first and second generation immigrants.

    • “Necessities” retailing — supermarkets, drug stores, food service and other service retailers — will remain stable.

    • Premium casual restaurants should do well but the higher-end restaurants will be challenged.

    • Health and wellness will maintain a strong trend.

    • Retail-based health clinics are growing and the industry’s potential to expand remains strong.

    With cautious optimism, many feel the economy is beginning to rebound. Through September of this year, the U.S. retail industry saw 3,840 store closings, according to the International Council of Shopping Centers. This was far short of the projected level of 10,000 to 12,000 closings, as predicted by experts at last year’s end.

    This year has provided an opportunity for well-positioned retailers to seize market share and strengthen their competitive position. They are poised to dramatically pull away from the competition and perform even better in the coming up-cycle. Successful retailers recognize that “you can’t win if you don’t play” and regional and national chains from apparel retailers to discounters to grocers plan to accelerate store growth in 2010.

    Given the limited new development and the already tight retail market in the Puget Sound area, we may find ourselves toasting a vibrant demand-side retail real estate market in 2011.

    Dani Kirkland, a CB Richard Ellis senior associate, specializes in the brokerage representation of retail property owners and tenants throughout Washington and the Northwest.

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