Shopping center owners have found themselves in a very unusual situation: for the first time in 20 years, demand for retail space is outpacing supply.
This demand has surged recently, and after years of muted construction and clearings of underperforming properties, the retail market is facing less available space. Properties that survived the purge have signed up tenants, which will attract more shoppers and give them more reasons to stay. That means more restaurants and places promoting recreational experiences, such as axe throwing and, more recently, pickleball. It also meant less space for traditional retailers that were not performing well, such as bookstores and clothing brands.
Because of these moves, “there’s not as much tenant shedding, and landlords are creating a more robust tenant mix,” said Barry Scardina, president of Americas retail services, agency leasing and alliances for Cushman & Wakefield, a real estate firm. “We are seeing some of the most productive occupancy rates recorded in the last 10 years.”
Cushman & Wakefield said in a recent report that mall vacancy rates are at the lowest in two decades, at 5.4 percent, and the edge in rent negotiations has shifted from tenants to landlords.
To meet demand, developers look for distressed and failing properties – or even locations where retail may be more suitable than the current use. Partners Capital is transforming a 100,000-square-foot office complex near Las Vegas into a $30 million project, called The Cliff, which will include restaurants, boutiques, health and wellness operators, entertainment space and a central bar. This is a shift from what the developer was doing just a few years ago, when it was selling off much of its retail center portfolio and focusing on industrial buildings that house tenants such as logistics providers, said Bobby Khorshidi, the company’s president.
Partners Capital’s move is an apt representation of how the fates of office and mall properties are turning elsewhere.
The pandemic has been “helpful” to sell “Retail.”
“A lot of abandoned space has been converted to other uses, and retailers with a lot of debt who were hanging on by their fingertips have been wiped out,” he said.
While the pandemic may have accelerated the recovery, it is based on a shift that began more than a decade ago. After the 2009 financial crisis and recession and amid the growth of e-commerce, retail bankruptcies created a glut of space, prompting many investors to sell or convert malls and embrace offices, apartments and warehouses. Shopping mall space, which had surged from 2006 to 2009, began to contract — primarily in two waves, first from 2009 to 2016 and then again during the pandemic.
Shopping malls that were still around changed their strategy to meet changing consumer tastes, and owners brought in high-traffic tenants including restaurants, entertainment centers, fitness operators, boutique services, public gathering areas and medical facilities.
In some cases, developers are adding apartments, grocery stores, hotels and offices, while continuing to trim excess store space.
Trademark Property Company plans to redevelop a 470,000-square-foot center in Arlington, Texas, by reducing retail space by approximately half and adding office, residential, hotel and entertainment uses.
Likewise, Shopoff Realty Investments plans to convert the vacant Macy’s and Sears stores near Westminster Mall, south of Los Angeles, into housing and about 25,000 square feet of food retail space, such as restaurants. The project is part of the company’s strategy to acquire and transform distressed retail properties. This typically reduces store space by 60 to 90 percent, said Bill Shopoff, founder of the Irvine, Calif.-based company.
“There are enough of these opportunities to keep our pipelines well stocked for a number of years to come,” he said.
She said open positions in high-growth markets such as Phoenix, Nashville and Austin, Texas, are leading this recovery. Scardina Cushman and other industry experts. Upscale malls have few vacancies as well, she added.
The industry has also seen an uptick in demand in recent years, as in-person shopping has seen a slight revival and more retailers have begun using stores as distribution points. Nationally, the average rental price of about $24 per square foot in the first quarter of this year was about 4 percent higher than it was a year earlier. In some cases, landlords can raise new rental prices by more than 30 percent over the previous lease, said Terry Montesi, founder of Trademark Property Company, a retail and mixed-use developer in Fort Worth.
The current environment is reigniting investor interest. Because retail properties have been out of favor, their value has generally not risen as much as apartments and warehouses over the past few years. As a result, malls can generate an attractive return compared to those more expensive assets at a time when interest rates are stubbornly rising.
“The fundamentals of the retail real estate sector are the strongest in my career,” said Mr. Hans. Montesi, who started Trademark in 1992. “Capital markets haven’t gone completely retail, but they’re starting to improve.”
But a handful of threats can derail the good times. Most notable, industry experts say, is that consumers are feeling pressured by inflation and have pulled back on discretionary spending, as reported recently in Walmart and Target’s quarterly earnings. Shopping center owners and retailers alike are under pressure from rising interest rates as well as increased construction and insurance costs, all of which drive up occupancy expenses.
Investors are also watching struggling retailers, as more clothing stores like Express and Rue21 file for bankruptcy, and major retailers like Macy’s and Walmart close underperforming locations.
Meanwhile, malls look better than they have in a long time, and spaces that quickly become vacant are often taken over by other tenants.
During the pandemic, developer NewMark Merrill secured pre-lease commitments for 100 percent of the Rialto Village project, a 96,000-square-foot center that opened last year in California’s Inland Empire, said Sanford Segal, the group’s CEO. A decade ago, pre-lease liabilities typically occupied 65 to 70 percent of the position, he said.
“Every time I go to a party of any kind and tell anyone I work in the mall business, people say, ‘Oh, poor thing!’” Mr. Hazard said. Segal, who bought four Chicago malls for nearly $100 million this year. “So the idea of getting calls from brokers the day after the store announced it was closing is very unusual. Maybe we are the cockroaches of an Earth extinction event.”
