Vacancy Isn’t a Bad Word Now That Lease-Up Means Mean Higher Rent and Diverse Tenant Mixes
Continued consumer strength and strategic vacancy management fueled marketplace growth in 2023. Market fundamentals remain positive, positioning marketplaces well for the year ahead.
U.S. marketplaces defied recessionary predictions in 2023, fueled by robust consumer spending and a healthy job market. Retail and food services sales climbed, particularly during the holiday season. This positive momentum translated into rising base rents, which climbed 6.2% year over year to $21.15 per square foot, according to the ICSC Marketplaces Industry Report: Q4-2023. This marks a significant 3.8% increase over 2019 base rents.
Landlords capitalized on this market by converting vacant big-boxes into higher-paying uses and renegotiating with existing tenants to higher rents. Phillips Edison & Co. exemplified this trend, boasting a staggering 25.2% increase in comparable-rent spreads for new leases and a 17.9% increase across all leases, new and renewed, in 2023. Notably during the fourth quarter, the company boosted renewal rents for inline tenants by 17%, highlighting strong demand for smaller, service-oriented spaces.
The positive trend extended across all regions in the U.S., the South and West leading base rent growth due to their booming populations and limited new development. However, the growth in percentage rent, which is tied to tenant sales, moderated. While percentage rent climbed 1.6% in 2023, this increase was significantly slower than the double-digit growth of the past two years. This could owe to a decline in new percentage rent leases, as evidenced by mall owner Macerich’s conversion of pandemic-era variable-rent agreements to fixed-rent ones.
Despite a 9.3% increase in expenses for shopping centers in 2023, net operating income continued its impressive growth streak, rising 4.5%. This positive performance is exemplified by Brixmor’s 4% increase in NOI during the fourth quarter even as it navigated store closings. The company strategically backfilled vacated spaces and secured a remarkable 60% rent growth on these re-leased spots.
U.S. shopping center occupancy also rose slightly, reaching 92% at the end of 2023, a 2.3-percentage-point improvement since the pandemic low. Tanger, for example, maintained a high occupancy of 97.3% and filled vacancies with categories like home decor and health-and-wellness. This tenant diversification positions Tanger for future sales growth.
Check out the full ICSC Marketplaces Industry Report: Q4-2023.
Planned Macy’s Closures Impact $24 Billion in CMBS Loans, but It’s Not the Apocalypse
Among the 150 stores Macy’s Inc. plans to close, 80 of them anchor malls that serve as collateral for $24 billion of commercial mortgage-backed securities, according to data from CoStar and Morningstar DBRS. Notably, $3.6 billion of this debt is already undergoing special servicing, indicating potential trouble. C+CT reported on Macy’s Inc.’s plans last week.
The nervous view: Retail CMBS remains stable compared with CMBS sectors like office and lodging, but the closures of Macy’s stores could exacerbate existing vulnerabilities, impacting cash flow at these properties and triggering defaults or missed payments. According to the Mortgage Bankers Association, delinquencies on retail CMBS loans remain elevated compared to pre-pandemic levels and significantly higher than multifamily and industrial CMBS sectors.
However, recent sentiment has been that landlords are happy to reclaim large spaces and thus gain control over their properties’ futures. Axios reported that despite the CMBS exposure to the Macy’s store closures, mall owners simply aren’t worried. And there is demand. Last month, C+CT reported on Dick’s Sporting Goods’ House of Sport concept and its plan to backfill mall anchors. Marcus & Millichap vice president Trever Gallina’s LinkedIn comment said a lot. He wrote: “I’d never thought I’d say this, but ‘good luck finding space.’”
2024 Store Plans for Whole Foods, Best Buy, Ross Stores, Nordstrom Rack and Target
Whole Foods Market Daily Shop
Whole Foods Market is venturing into a smaller store format called Whole Foods Market Daily Shop in order to reach dense urban areas. These quick-shop stores, ranging from 7,000 to 14,000 square feet, will offer grab-and-go meals, essential groceries and prepared foods, complementing existing larger stores. The concept will launch on Manhattan’s Upper East Side this year.
Nordstrom will open 22 Nordstrom Rack off-price stores this year. Last year, it opened 19 Rack stores. Rack net sales were flat from 2022 to 2023, while sales across traditional Nordstrom stores declined 8.2%.
Ross Stores is taking a cautious approach to expansion of its DD’s Discounts chain into new markets. Following less-than-ideal results in 2024, Ross Stores CEO Barbara Rentler has announced a shift in focus toward existing markets while the company conducts additional research. This strategic change comes after a year of significant growth. In 2023, Ross Stores added a net 94 stores, bringing its portfolio to 2,109, including 345 DD’s Discounts. In 2024, the company plans to open 75 Ross Dress for Less locations and 15 DD’s Discounts.
Best Buy expects consumers to buy more tech products this year. Dual-screen laptops and customized appliances are generating the most buzz. The company intends to expand into categories like wellness technology, personal electric transportation, outdoor living and electric car charging in 2024. It also is transforming its physical stores to align with in-store pickup of online orders. CEO Corie Barry said that of Best Buy’s online orders, customers pick up 40% in store. She announced that dedicated space for processing and fulfilling online orders will replace product displays. In addition, Best Buy plans to close 20 to 30 large-format stores and invest $200 million in renovations of other stores. This includes remodeling eight large experiential stores and two midsize locations. Best Buy also will open around 10 outlet stores focused on discounted merchandise. It will continue to monitor a small-format concept focusing on tech tools that it launched last year.
Target will build more than 300 stores to reach new customers over the next 10 years. It also will renovate the majority of its nearly 2,000 stores. Some will be full remodels, some will add Ulta Beauty stores-within-stores, some changes will be smaller like upgrading fixtures and others will adapt to support same-day pickup of online orders. Target’s 2024 priorities include using artificial intelligence and sorting centers to make next-day delivery faster and more efficient.
Web Traffic Results After CBL Put Mall Retailers’ Inventory Online
Three weeks ago, C+CT reported CBL Adds Tenants’ Inventory on Two Malls’ Websites, and now CBL has early results on that endeavor, which displays in one spot on a mall’s website the inventory in stock throughout the mall. The week after Inventory Insider launched, traffic on both Tennessee properties’ websites surpassed December 2023 traffic, including the week before Christmas. Moreover, data suggests shoppers are returning to use the online platform, according to the company. Return visits to CBL’s website set a record for the month of February and exceeded December 2023.
By Brannon Boswell
Executive Editor, Commerce + Communities Today