This is a market in which news of a store closing from the likes of Bed Bath & Beyond or David’s Bridal often is viewed as “good news” by both landlords and prospective tenants. That’s a testament to the scarcity of supply and voracious demand for junior-box space.

Tenants searching for junior-box spaces are finding few options and radically higher rents, particularly in high-growth areas across the Sun Belt. “It’s a big change for the junior-box retailers because they’ve really been in control and there have been a lot of options but there just aren’t a lot of new centers being built today,” said Edge Realty Partners managing principal Brian Murphy. In some cases, rents are up 80% over a few years ago, noted Murphy.

Higher rents owe to demand, as well as higher construction and financing costs. For example, Edge Realty worked on a development four years ago for which construction on the junior-box shell was just under $60 per square foot and sitework was about $8 per square foot. Today, that same shell would cost $92 per square foot and sitework $14 per square foot. Interest rates that were 4.5% are now 7.5% or even higher. “There has been a dramatic change in costs that has really stopped a lot of new development,” said Murphy. So to meet store-development goals, retailers are lining up to compete for existing spaces, which is driving rents higher.

“Obviously, there are capital constraints, but tenants are stepping up to rent numbers that we haven’t seen in the past for junior-anchor and even anchor-size boxes because it is just that tight,” agreed SRS Real Estate Partners senior vice president and principal Dawn Greiner. Rents vary depending on the geographic area and store buildout costs. In Texas, rents on junior-anchor boxes in Texas are pushing into the low $20s or even close to $30 per square foot. “In markets that are 45 miles away from the Dallas core, we’re seeing rent numbers being quoted in the $30s and even $40, which is extremely high from what Texas has seen in the past,” said Greiner. Tenants also are committing to longer, seven- and 10-year deals to better compete, she added.

Demand Outweighs Supply

Junior boxes are feeling the effects of tightening supply across the retail market. According to CBRE, U.S. retail vacancy dipped to 4.8% in the first quarter, while the development pipeline remained thin with record-low deliveries for the quarter at 5.1 million square feet.

In the Phoenix metro, retail absorption is about double the pace of new deliveries, noted James DeCremer, a principal in the Phoenix office of Avison Young. “The development community is frantically trying to deliver more retail space, but with construction costs and entitlement time, it is just not happening very quickly. So we are a little bit out of equilibrium with supply and demand,” he said.

Rents on the existing supply of junior boxes in the Phoenix metro have increased 25% to 30% over the past 12 to 24 months and are pushing into the low $20s or even $25 per square foot. It’s challenging to arrive at a set of economics that works for those tenants that are more rent sensitive, said DeCremer. However, most retailers are adjusting to the new reality. “We’re not seeing rents that are holding back expansion,” he said. “These users are still active. They still want new stores in the market, and they’re still bullish on Phoenix long term.”

In some cases, higher rents are prompting retailers to be a little more efficient with their space when they approach dealmaking and to rightsize store footprints, said DeCremer. “Anytime that space is this tight and they are serious about getting stores open, there is a little bit of creativity required,” he added.

Retailers Chase Vacancies

Retailers that are hungry for space are eagerly waiting for vacant boxes to return to the market. “It’s not like it used to be, when losing a junior-box tenant was bad news,” said Murphy. Now, when a tenant such as David’s Bridal vacates a space, there are three or four interested groups competing for that space and landlords are coming out in a better position with a good credit tenant and a higher rent. For example, landlords have the potential to take back leases on Bed Bath & Beyond spaces that were originally done at $9 to $10 per square foot and raise them to market levels of $15 to $22, depending on the location, noted Murphy.

Although retail bankruptcies have been relatively quiet in the past year, Bed Bath & Beyond Inc. filed for Chapter 11 in April, and A&G Real Estate Partners has auctioned off hundreds of leases for the company’s Bed Bath & Beyond and BuyBuy Baby stores. The 353 Bed Bath & Beyond stores, spanning 48 states and Washington, D.C., range from 18,000 to 92,000 square feet, while BuyBuy Baby had 108 leases in 37 states that range from 14,000 to 63,000 square feet. A&G held an auction on July 13 for 44 David’s Bridal leases ranging from 5,000 to 15,000 or more square feet.

Even at auction, the deals are a little tough for tenants to pencil because they don’t account for needed capital improvements, said Greiner. “The landlords would love to recapture these boxes versus going to the auction so that they can bring in great credit tenants and help to bridge the gap with a tenant allowance and construction costs,” she added.

Earlier this year, A&G auctioned off more than 250 Tuesday Morning leases and 34 Party City leases around the country ranging from 6,000 to 28,000 square feet. “That will provide some opportunity, but you also have a ton of retailers that are gobbling up space right now — from Aldi to Five Below to Planet Fitness to T.J.Maxx, Ross, Nordstrom Rack and others — that are all chasing the same space,” said Greiner.

Steady Expansion Track

The sluggish economy doesn’t appear to be putting much of a dent in demand for space. Retail remains healthy across categories and there’s demand coming from other sectors, such as entertainment, fitness and healthcare. According to Northmarq’s Top 100 Tenant Expansion Trends: Q1 2023, some of the traditional soft goods retailers — Ross Dress for Less, Marshalls/T.J.Maxx and Burlington — have dozens of stores set to open this year:

• TJX Cos. plans to open 150 Marshalls and T.J.Maxx stores in 2023 at a typical footprint of 30,000 square feet.
• Ross expects to open 100 locations in 2023 at a target of 22,000 to 30,000 square feet.
• Burlington has said that it will open between 70 and 80 stores this year, ranging from 25,000 to 40,000 square feet.
• Ulta Beauty, which typically leases blocks of 10,000 square feet, also plans to open 25 to 30 stores this year.

From a pipeline perspective, some new projects are being delivered, but junior-box retailers rely more on existing space from tenants that are relocating or going out of business. “When you get a space box back in the junior-box size, there is just a ton of interest and a ton of competition,” said DeCremer. That being said, developers are trying to catch up to demand, he added, and a lot of exciting projects have been delivered or are in the pipeline right now.