Sizing Up Retail Real Estate’s Prospects at ICSC

Where is retail real estate headed? At ICSC’s annual New York City convention last week, the picture that emerged was both complex and promising. Observations from a variety of industry professionals confirm that predictions of brick-and-mortar’s demise were premature. And contrasted with the impression that some categories of retail real estate were on life support, or worse.

Retail real estate professionals talk deals at ICSC’s annual event in New York City. Photo by Paul Rosta for CPE

Demand for many retail property categories is proving to be remarkably resilient. Overall, the retail sector has achieved positive absorption for eight quarters in a row, stretching back well into 2021.

Standout categories range from neighborhood and community centers to strip centers and power centers, which have all demonstrated strong absorption “at a time when there’s very little new supply,” noted Brandon Isner, head of retail research at CBRE, during the two-day event at Manhattan’s Javits Center. Retail space deliveries reached record lows in 2020 and 2021, and those records are on track to be broken again in 2022.

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Retailers, owners and consumers are grasping an important truth about the complementary nature of retail channels. “What we’re all realizing is that e-commerce and brick and mortar are not at war with each other. They work together to make each other better,” Isner observed.

2022 surprises

Some of those professionals reported encountering the unexpected during the past year. “The biggest surprise we’ve experienced has been that there’s no slowdown,” said Terry Ohnmeis, a director at Cushman & Wakefield specializing in retail leasing and tenant representation. Much of that is stemming from a supply-demand imbalance: “There hasn’t been enough new product coming on the market to satisfy the demand for quality.”

Restaurants are behind much of the demand for new space in the Ohio markets Ohnmeis serves, primarily the Cincinnati metropolitan area, Columbus and Cleveland. He estimates that about 50 percent of the deals he’s arranged this year involve restaurants, up from 20 percent a year ago. Suburban locations with strong visibility, strong traffic flow, patios and grocery stores or other reliable anchors are in especially high demand.

Nevertheless, current conditions also call for operators to demonstrate prudence, attendees said. In some retail categories, the number of potential tenants is dwindling, making it all the more challenging—and necessary—to be selective. Tenants and retailers have higher expectations for owners’ investment in the property, observed Matthew Harding, CEO of Levin Management.

“You really have to evaluate the terms of the deal,” he advised. Operators should be “a little cautious in terms and about the investment you’re making.” A key consideration is whether the prospective tenant has sufficient staying power to justify significant improvements and other expenditures, he said.

Going upscale

At upscale properties, high-end retailers are driving the demand for expansion. “Luxury is still robust,” observed Rosalind Schurgin, CEO of The Festival Cos. “Everyone wants to be closer to the consumer”—and that is creating demand for space at lifestyle centers that are closer to the consumer than regional malls. Demand is also emerging for personal services related to beauty and health, she added.

Consumer demand for high-end products remains undeterred by inflation, and that’s spurring pent-up activity at the upscale town centers operated by Steiner + Associates. In the Columbus area, for example, “Aspirational luxury space was untapped before Covid,” noted Spencer Jordan, vice president of leasing. “We’ve been seeing a huge explosion of growth in openings at higher price points to expand (luxury retailers’) footprints.”

Lease terms are also evolving to provide owners and retailers more flexibility. “Kickouts are becoming more common as retailers need 10 years to amortize costs but need flexibility if the store isn’t performing,” Spencer reported. The latest twist is that if the store reaches the specified sales target at any time during the specified period—the first four years, for example—that qualifies as meeting the target. Should sales fall short afterward, the tenant has the right to exit the lease.

Continuing a years-long trend, Class B and Class C malls continue to be a weak spot for the retail sector, but also offer potential upside, contends Ronald Goldstone, executive vice president at Farbman Group. “I think there are going to be opportunities (to) reposition vacant retail malls,” he predicted.

Goldstone cited the $1 billion plan to demolish much of Lakeside Mall in Sterling Heights, Mich., a Detroit suburb. The proposal calls for a mixed-use community encompassing residential, office, retail, hotel and park components. In October, the city council approved a memorandum of understanding for the project with the mall’s owner, Lionheart Capital.

Too often, though, outdated or inflexible zoning creates hurdles that discourage potential projects. For underperforming or past-prime retail assets to gain a second life, the public sector must do its share. “Creativity is the name of the game,” Goldstone said. The chances for successful redevelopment increase dramatically “when the community is in front of it, rather than waiting for the developer.”