Don’t Believe the Hype – Retail Market Strong as Ever Amid Natural Turnover
Published: July 30, 2024
We’ve all read the headlines recently. From Big Lots to Joann’s to Express, many retailers which were staples of popular retail centers at the turn of the century have succumbed to the pressures of online shopping, higher interest rates and rising costs, and called it quits (or are significantly reorganizing their companies). So is the retail market suffering, destined to face continuing failures and leave us with empty, decaying retail centers and shopping malls?
Recently, as part of a new series profiling industry segments, I sat down with John Brecher, Vice President at JLL, to discuss the state of the retail market. John has been working in commercial real estate for nearly 15 years, handling all manner of retail transactions including leasing, sales and development. John and his team regularly deal with both national and local tenants and landlords, and therefore have a strong pulse on the overall sentiment of their sector.
According to Brecher, retail demand to lease space is as strong as ever. While the closure headlines may grab the attention of the casual observer, these failures are more likely to represent natural turnover of stale retail concepts rather than a sign of greater market struggles. Retail activity is steady and increasing, as quality locations are in high demand; indeed, the biggest hurdle that retailers often face is a dearth of available space. Certainly, there are new challenges presented by, among other things, rising labor costs, sustained high interest rates, and continued supply chain constraints, but successful retailers have largely adapted to this new environment. For landlords with quality available space, numerous eager operators are often in line and ready to step in right away.
In fact, while the headline-grabbing bankruptcies may present brief, short-term challenges for landlords, these vacancies often result in new tenancies with credit-worthy tenants at higher rents. Brecher explained a recent transaction in which the current retailer, paying approximately $3/square foot annually, vacated a location only to be replaced by a newer and stronger national operator paying over $9/square foot. In other words, landlords with older leases at below-market rents may see these changes as significant opportunities to bring in fresh occupants willing to pay new, inflation-adjusted rents.
Of course, not all stories have happy endings. The key here is that quality locations will continue to see strong leasing activity with increasing rents. Lower-end centers with less desirable locations and aging improvements have not seen as strong of demand. This is perhaps to be expected for these projects, but where a long-term lease was propping up an otherwise struggling center, a new vacancy may spell doom.
Retail transactions have flooded our to-do lists, as we’ve recently handled numerous leases and sales in the retail segment. This includes not only big box and other traditional retailers, but fast food, QSR and medical retail and other related operations. We’ve even helped clients recently with large, anchored shopping center ground-up developments, as yet another signal that our clients in the retail space have confidence that market demand will continue. These transactions, as well as the activity that brokers like John Brecher are seeing, should convince all of us to avoid the attention-grabbing headlines and focus on the numerous opportunities that are available in the retail market.