One year ago, hope for a quick resolution to the COVID-19 pandemic gave way to the sobering reality that relief was months, if not years, away, leaving the retail industry to negotiate a volatile environment. For shopping center developers, that has meant trying to sign tenants and open projects in concert with a waning virus, the end of restrictions on gathering, and growing public confidence.

Optimism has been spreading of late, and yet the virus is gaining ground again in areas like Florida. Thus developers still face danger: Opening too soon could prove disastrous if a virus resurgence triggers a return to lockdowns and creates dormant space, and delaying projects could raise costs substantially. Among other trends, costs for construction materials have risen dramatically since April 2020. Lumber has increased 203 percent and copper 89 percent. Additionally, completion guarantees at projects under construction put equity holders at extreme risk.

Barry LePatner — founder of real estate, design and construction law firm LePatner & Associates — said: “I’ve spoken to dozens of developers, landlords, brokers, accountants, lawyers and bankers, and I’ve come to realize that everyone has what the tech industry refers to as ‘FUD’ – fear, uncertainty and doubt. Nobody knows with any sense of assurance how or when we’re going to come out of this pandemic.”

In the summer, LePatner spent several weeks advising developers who were debating whether to move forward with a $2 billion mixed-use project in the early phases of development. They chose to pursue the endeavor, figuring that its expected 2022 opening was far enough in the future to miss the worst of the pandemic turmoil. Other developers are following the same line of reasoning.

The case for waiting to lease

Developers’ approaches largely depend on state and local occupancy restrictions on shopping, entertainment and dining out, observer say. They also hinge on whether the developers are well capitalized and if they can carry half-empty projects in uncertain markets, suggests Brandon Singer, a former Cushman & Wakefield broker who in September founded retail brokerage and advisory firm Retail by Mona.

Singer is marketing, for example, ground-floor retail space for an office project in Manhattan’s Chelsea neighborhood. It’s expected to be completed in the fourth quarter of this year. He’s holding off on signing tenants as the retail market in New York struggles with historically dire fundamentals. Last fall, the average asking rental rate was flat in one of Manhattan’s 17 corridors compared to a year earlier and it declined in the other 16 by a range of 3 percent to 22 percent, according to the Real Estate Board of New York. Eleven of those corridors reported their lowest rental rates on record. Retail space availability also increased, by a range of 6 percent to 67 percent, across 11 of the 17 corridors.

“We’ll make a deal if a tenant comes around and the deal makes sense,” Singer said. However, the building isn’t ready yet, so “why would we commit to something today when it’s as bad as it ever has been and when six months or so down the road, the environment will be better?”

Just like developers, many tenants remain on the sidelines, says David Greensfelder, founder and managing principal of Greensfelder Real Estate Strategy, a provider of strategic planning, market analytics and development services for owners, occupiers and communities. Exceptions are COVID-resistant quick-service restaurants, urgent care and necessity-based retailers.

He’s working on projects in California, Hawaii, New York and Iowa and says would-be tenants are unsure of when they would be able to move in and use the space. “It would be irresponsible for retailers to pay rent on space that they can’t use,” he explained. “So developers with projects in the ground are trying to pace the progress to when they can get some leasing traction, but the question is: How much has the market and retail changed, and is there still demand?” 

The case for leasing now

Kenton McKeehan, a senior managing director of the retail resources group and investment management at Hines, suggests that securing retail tenants in a timely manner is key for mixed-use developments to attract residential and office tenants. The firm is set to deliver four mixed-use projects in California, North Carolina and Washington, D.C., through 2024. The first of those, Cary, North Carolina’s Fenton, is scheduled to begin opening 195,000 square feet of office, 357 apartments and 348,000 square feet of retail in the spring of 2022. Later phases call for Hines and its development partners, Columbia Development Group and USAA Real Estate, to add boutique hotels, 800,000 square feet of office, 92,000 square feet of retail and some 500 multifamily units.

“The pandemic hasn’t forced us to push out our retail leasing,” McKeehan said. “It’s well ahead of pre-leasing in other parts of the project, and that’s very much intentional on our part.” Tenants have committed to about 80 percent of the retail space, he says, and a 125,000-square-foot Wegmans and a 36,000-square-foot Paragon Theaters will anchor the project. Paragon replaced CMX CineBristo, the initial theater operator, after CMX Cinemas filed for bankruptcy in April 2020 and shifted its focus to existing locations. Paragon, meanwhile, had sold some of its assets before the pandemic and was well positioned to expand, McKeehan adds. The balance of tenants include Sephora, Arhaus furniture, Fifth Third Bank, Free People and regional and local services, restaurants and retailers.

A project where leasing efforts had slowed

In Lincoln, Nebraska, The Lerner Co. recently broke ground on NorthStar Crossing, a 500,000-square-foot project roughly split between conventional retail and restaurant users on one parcel and medical users and distribution tenants on a second parcel. Lerner began marketing the project about the time the pandemic hit, but grading issues have dogged the project more than the health crisis, says Ben Meier, vice president of the commercial real estate brokerage, development and management firm.

While Nebraska enacted some occupancy and restrictions, businesses generally remained open or were closed for only a brief period. Nevertheless, many tenants that showed interest early on quickly tempered it, Meier acknowledges. “When the pandemic started happening a year ago, we had the expected ups and downs,” he said. “Tenants were saying, ‘We planned to go in. Now it’s on hold, but we’ll be back. Just give us more time.’ I don’t mean to sound insensitive, but now it’s almost a non-event given that we’ve got to build stores and make some strategic moves in order to conduct business.”

Northstar Crossing is expected to begin opening in early 2022 and is adjacent to Lincoln Crossing, another Lerner development that attracts a large amount of traffic, Meier adds. Lerner is still negotiating with tenants, but Meier expects the center to include a small grocer and junior boxes surrounded by some 15 pad sites that the firm is selling. If anything, he points out, the pandemic has sparked some unexpected interest in pad sites, particularly from restaurants, convenience stores and services that need additional locations after experiencing a surge in business over the past year. In one case, a potential pad buyer is rolling out a hybrid prototype to facilitate a new way of doing business, Meier notes.

Development delays for reasons other than foot traffic

For some developers, weather and disruptions in the construction supply chain have overshadowed concerns about timing the pandemic. Developer Christopher Chandor waited several years for Kmart to vacate the Cross Keys Place shopping center in Doylestown, Pennsylvania, so a 50,000-square-foot Giant grocery store could move from elsewhere in the center and expand to 72,500 square feet. Chandor finally gained control over the space in early 2020.

The developer knocked down the Kmart and started site preparation for the Giant in January 2021, when one of the most snowy seasons on record hit. A shortage of steel decking and trussing also has delayed the project. As a result, the new store will open in the spring of 2022 instead of this Thanksgiving, as originally planned, says Chandor, a managing partner of Cross Keys Development. Cross Keys Place also features an existing hardware store. “Timing has never been an issue for us because grocery stores and hardware stores have been the stars during the pandemic,” said Chandor, who also is CEO of commercial real estate firm Penn’s Grant Corp.

In the meantime, the center has gained other tenants. Five Below will open in November, and Marshalls and HomeGoods are scheduled to open in 2023 in the space Giant now occupies.