Strong tenant demand and limited new construction kept the Marketplaces Industry’s vacancy rate healthy in the first quarter of 2023, according to Cushman & Wakefield. The U.S. retail vacancy rate measured 5.6%, the lowest since at least 2007, when the firm’s data set begins. This was essentially unchanged from the fourth quarter.
The industry has shown a remarkable ability to withstand the challenges of an uncertain economy, according to Cushman & Wakefield Americas retail services head Barrie Scardina. Value retail, ultra-luxury and consumer services continue to grow, including health-and-wellness-focused services that require in-person transactions and drive foot traffic throughout shopping centers, she said.
Tenants are revising their capital spending budgets to address the omnichannel revolution and e-commerce platforms, according to Kimco Realty CEO Conor Flynn. The landlord’s tenants readily are investing capital in refurbishment, expansion, fulfillment and last-mile distribution, he said on a first-quarter earnings call. “When retailers evaluate their real estate, they no longer separate their warehouse and distribution needs from their sales requirements. Today, leading retailers are taking a holistic approach to determine the best locations to ultimately serve their customers. Indeed, this integrative approach is the dominant recurring theme during our portfolio reviews with retailers and is creating more demand for optimal location.”
The first quarter marked the U.S. retail property market’s eighth consecutive quarter of positive net absorption, meaning the square footage of stores that opened is higher than the square footage of stores that closed, according to Cushman & Wakefield. In total, retailers moved into about 2.5 million square feet of space during the quarter. Looking at demand regionally, 45 of the 81 markets tracked by Cushman & Wakefield experienced positive net absorption. The most new stores arrived in Houston, New York City, Charlotte, Phoenix, Chicago, Raleigh/Durham and Denver.
Kimco, for one, reported strong leasing progress. First-quarter positive net absorption has been rare historically, Flynn said. Nonetheless, Kimco occupancy increased 30 basis points year over year in the first quarter of 2023. The company's portfolio is now 94.7% full.
Negative absorption was concentrated in the West and Midwest, according to Cushman & Wakefield. Markets where retailers closed more space than they opened in the first quarter included Los Angeles, Las Vegas, San Diego, Seattle, Sacramento, Detroit, and Kansas City. Demand increased at neighborhood/community centers and strip centers, which are smaller and more convenient, and decreased at larger properties like power centers, according to Cushman & Wakefield.
Little construction took place last year, and 2023 is expected to be similarly slow, according to the company. About 13 million square feet of retail space is under construction in the U.S. Many recent projects have been conversions or redevelopments, and that trend is likely to continue, as it’s a more cost-effective way to create new retail space than building from scratch. As a result, high-quality retail space is likely to remain in high demand and continue to command a premium price.
But if unemployment jumps and the economy sours, retailers might be forced to cut back on real estate expansion, Scardina warned. “Retailers are preparing for more challenging times ahead, with many large-cap names missing earnings estimates and marking down 2023 growth projections,” she said. “Investors are taking notice and pressuring retailers to cut costs.”
Bed Bath & Beyond Replacement Tenants Will Pay as Much as 30% More
Specialty grocers, discount chains, sporting goods stores and furniture retailers are interested in leases on the 350 stores Bed Bath & Beyond might close as part of its bankruptcy filing and anticipated liquidation. Replacement tenants likely will pay 20% to 30% more rent than the struggling home goods chain was paying, according to a Wall Street Journal article citing landlords of those spaces. In a tight market, Bed Bath & Beyond stores are the right size — 25,000 to 35,000 square feet — and in the right locations — prime suburbs — to appeal to a range of tenants and generate top-of-market rents. The rate of available retail space in the U.S. is the lowest since 2007, according to Cushman & Wakefield, whose data set begins that year, and since 2005, according to CBRE.
Marshalls, T.J.Maxx, Family Dollar, Dollar General and Dollar Tree are among the chains that need more physical space and could take over entire Bed Bath & Beyond stores. Amazon could be a contender as it expands its Amazon Fresh supermarket business. Even with these opportunities to boost income over the long term, landlords will feel some pain as they backfill Bed Bath & Beyond closures. Swapping out tenants in such big boxes usually takes at least a year, Piper Sandler’s Alexander Goldfarb told The Wall Street Journal.
4 Retailers Adding Stores and 1 That’s Renovating
Academy Sports + Outdoors has opened its first store of 2023, a 60,000-square-foot unit in Lafayette, Indiana. It’s a preview of the retailer’s Midwest expansion. Academy Sports wants to open 120 to 140 new stores by 2027, expanding its store base by 50% in existing and new markets. It currently operates 268 stores and targets 13 to 15 openings in 2023 after nine in 2022. The retailer plans to grow its store count to 800 in the long term.
Barnes & Noble will add 30 stores this year. That’s nearly double the 17 it opened in 2022, the most in a single year since 2009. It currently operates about 600 locations.
Fast-fashion retailer Primark wants to establish “a significant presence” in the southern states. Primark’s parent, Associated British Foods, expects to sign leases across the South, including in Texas, in the coming months. The new stores will be “anchored” by a distribution center the company is building in Jacksonville, Florida, its second in the U.S. Primark has 17 U.S. stores, most of them in New York and New England. In late 2021, the company announced plans to open 43 more in the U.S. by 2027.
Subway’s makeover is making progress. Sales at stores that had been open for at least one year grew by 12.1% year over year in the first quarter. The sandwich chain is driving traffic by renovating stores, moving away from its reliance on franchisees who own one or two locations each. Instead, it’s consolidating locations with a smaller number of franchisees that are larger and well-capitalized. The company aims to boost profitability as it seeks a private equity buyer.
Uniqlo will open four U.S. mall locations this summer — in California, Maryland and New Jersey — as part of its plan to reach more than 200 locations in North America by 2027. It hopes to open 20 to 30 stores each year.
A $240 Million Opportunistic Fund for Open-Air Retail
Continental Realty Corp. closed on a $240 million retail fund to investment in open-air retail. The equity will allow the company to take advantage of opportunities it expects to arise in the next few years, including distressed, opportunistic and value-add properties. The company sees this as a favorable investment environment. “Some investors are inclined to exit shopping centers, even though there is a notably different risk profile between malls and strip centers,” Continental Realty COO David Donato said. “Some of our best shopping center purchases occurred following the economic downtown in 2009, when investors weren’t buying shopping centers and similar dynamics were in play. Today, many would-be market participants are presently sidelined.”
A Rare, 22-Store, Arby’s Portfolio Drew a Broad Range of Bidders
Institutional REITs, 1031 buyers and private investors swarmed a 22-property Arby’s portfolio that spans Iowa, Montana, North Dakota, Nebraska and Wisconsin. When a multigenerational franchisee sold the franchise business, all new leases were executed and then the real estate came up for sale. The portfolio ultimately sold for $35.1 million, part of a $52.6 million disposition assignment in which 28 properties have closed and five more are under contract. “The sale demonstrates market demand for fundamentally strong net lease investments by portfolio buyers and individual investors,” said Drew Isaac, senior managing director of investments in the Denver office of Marcus & Millichap, which represented the seller.
Colliers Engineering & Design Buys Detroit-Area Architecture Firm
Colliers Engineering & Design acquired Southfield, Michigan-based Rogvoy Architects. The acquisition establishes Colliers Engineering & Design’s third office in Michigan.
C-Suite Changes at URW
Unibail-Rodamco-Westfield promoted Anne-Sophie Sancerre to chief customer and retail officer charged with driving footfall and consumer demand, generating new revenue and growing retail operations. Sancerre, most recently COO for Southern Europe, will replace current chief customer officer Caroline Puechoultres, who is leaving the company. Meanwhile, Vincent Rouget will join URW, which is shopping its portfolio of U.S. malls, as chief strategy and investment officer. Rouget was previously a partner at private equity firm Aermont.
Have News to Share?
Send your people news and other announcements to Commerce + Communities Today executive editor Brannon Boswell at bboswell@icsc.com.
By Brannon Boswell
Executive Editor, Commerce + Communities Today