As we work our way out of the great recession, there have been pockets in every retail market that have out-performed other areas of these municipalities. For example, here in the Phoenix market, the North Scottsdale retail vacancy rate is hovering in the mid 6%, while the market as a whole is above 10% vacancy. Not only are specific trade areas outperforming the greater market as a whole, but specific property types continue to surpass the general retail market. Once again, back to our local market where power centers have a vacancy in the mid 5% range. Along with these lower vacancy statistics comes increasing rental rates and a lack of tenant incentives in these trade areas and property types.
But, what does this mean if you aren’t holding a Core Regional Power Center asset?
Over the course of the next 12 months, retail projects that might not be position A-1 in a trade area will start to see more deals. Wall Street continues to pressure publically traded retailers and restaurants to expand by adding more locations. This will force these retailers to look at B and C property to fulfill their quota of deals.
Mom and Pop concepts with one to four locations that have weathered the storm will start to look for that next location. Banks are slowly opening their wallets to these successful retailers, and the availability of additional capital will allow expansion plans to pop up.
The desperation deals of 2009-2010 that featured lower rents, heavy incentives, but were tagged with a “Fair Market Value” option term will also be rolling over in the coming months. Tenants in power centers and hot target markets that have become accustomed to rents that are significantly below market rate will have sticker shock at the price of today’s real estate in these trade areas. In order to keep their rent at a reasonable rate, moving will become the only viable option.
Additionally, national REITs like DDR have announced programs to allow under-performing retailers to relinquish their spaces at core assets, allowing these REITs to fill the location with a retailer or restaurant that might be a better fit for that particular project. Tenants that give up their prime space will be in the market for a new location at a rental rate that is sustainable to their business or a trade area that is a better match for their concept.
As a property owner of non-core real estate, the time is ripe to start picking off tenants and filling vacancies. It will be important to remain the value option, be flexible with terms, and induce tenant’s to fill your space. There will be a battle for these new deals, with many owners rolling out the red carpet to gain tenancy, but these owners will finally be seeing new options and getting the opportunity to fill some vacancies.
By: Kalen Rickard
Vice President, Strategic Retail Group
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