Retail’s working with a mixed bag.
Nowhere was that clearer than this past week when the industry descended in Las Vegas for the International Council of Shopping Centers’ annual confab. ICSC estimated more than 20,000 attendees were expected for the Vegas trade show and conference, according to a magazine distributed during the event.
Bob Drury, who runs Crexi’s auction platform, can see in real time what deals are taking place and gauge industry sentiment.
“There is some concern with the tariffs, the new administration and what impact that’s going to have and so it’s caused some uncertainty,” Drury said earlier this week at the Las Vegas Convention Center. “For the first time in quite a while, retail tenants have given up more space than they’ve occupied. Then again, I talk to some retail developers [who say], ‘We’re so busy doing tenant expansions.’ I think if you go to any core market, retail is booming and vacancies are low.”
Big box blues
Big box absorption can offer a gauge of market health, several executives said at ICSC.
Crexi’s Drury noted the company’s sold around 25 vacant big box spaces in the past year. That real estate was snapped up by regional developers with tenants waiting to fill up space left behind by bankrupt retailers.
“The bankruptcies, none of them were a surprise to us,” said Allison Lynch, COO of Culver City-based Primestor, which focuses on urban markets with large Latino populations. “They’re retailers we’ve been tracking. Rite Aid, we saw it coming. We have two tenants lined up for that space we have Rite Aids in. So we had a strategy in place about who might fit there and how we might move tenants around.”
Kean Thomas, who oversees finance and accounting at Vestar, said about as much.
The Phoenix-based shopping center development and management company hasn’t batted an eye when it comes to backfilling space left by big box retailers.
“It’s a similar story that we’ve had play out over the last five to seven years through Covid and then post-Covid with the Bed Bath & Beyonds of the world,” Thomas said. “Now we’re looking at Joann. Kirkland’s is challenged. You have Big Lots.”
In the case of Party City stores, Vestar has refilled every space except for one, which a tenant has expressed interest in, Thomas said.
“No one’s building more Party City-sized boxes,” Thomas said. “So, there’s going to be people who want to backfill them, if you’re in the right submarket.”
California vs. Texas and the rest
On the investment side, Garrett Wood of Hanley Investment Group said last year was his Texas team’s best year on record for volume and expectations are about the same for this year.
In fact, Texas was the No. 1 state for sales volume across Hanley Investment, surpassing California for the first time to leave the Golden State in the No. 2 position.
“We’re based in California, but we have so much demand from capital moving, wanting to buy net-leased and multi-tenant retail centers,” Wood said Tuesday while in the midst of a final push of meetings hours before ICSC’s end later that day.
For Vestar, the company is most active in Phoenix for development, but it’s looking at sites in Las Vegas, too.
Zooming out nationally, Vestar’s Thomas said, any growth market is likely to see the same flurry of activity akin to what his firm is a part of in Phoenix. That includes parts of Denver, Idaho, Texas, Mississippi and Tennessee.
“You have areas of the country where you’ve taken in 50 to 100,000 people in some of these pockets with no new power centers,” Thomas said. “There’s going to be demand.”
Credit vs. cool
The conversation around credit tenants vs. non-credit continues to rage on in retail.
“Even 10 years ago, we always used to say, ‘credit vs. cool,’” said Avison Young’s head of retail intelligence Meghann Martindale. “Do you go with the credit, super stable national chain or, on properties you want to differentiate, you need that cool factor?”
Bonside’s Scorecard, which was officially announced along with equity investments from Kimco and Nuveen Real Estate at ICSC, thinks its underwriting technology could help level the playing field for smaller mom-and-pop tenants. The tool analyzes store profitability, labor, cost of goods sold and other metrics to help make the due diligence process more transparent for landlords and tenants.
“One of the things that became really apparent to me was that no one really understood how to evaluate brick-and-mortar,” Bonside founder and CEO Neha Govindraj said. “Maybe they thought about it but were applying a blanket approach.”
That could come in handy to avoid the headache of litigation.
Unibail-Rodamco-Westfield’s Culver City mall subsidiary in March filed a lawsuit in Los Angeles Superior Court against churreria Azucanela LLC that represented one of at least six filed against tenants at URW’s Culver City and Century City properties in about the past year. The complaints allege breach of contract among other claims or are an attempt at eviction.
Similar disputes have also cropped up between the mall owner’s Westfield Valley Fair subsidiary in San Jose, where it’s trying to collect a combined $428,000 in back rent from two tenants.
Westside woes
One thing all could agree on at ICSC is that restaurants’ popularity among landlords hasn’t waned.
Even still, in Los Angeles, finding second-generation restaurant space — meaning, real estate equipped to handle food and beverage — have been a tough sell on the Westside, according to Carolwood Estates’ Sheela Shouhed.
More specifically, that’s West Hollywood and Beverly Hills, where permitting challenges to get her restaurant clients into space have been tough.
“It’s the lack of second-generation restaurant space that is causing deals to fall through,” Shouhed said. “I had a lease fall through last year for a high-end bakery concept.”
The client’s budget required an existing kitchen. Shouhed still hasn’t been able to find that business a space.
The broker pointed out as another example, an established coffee tenant that wanted to move onto Beverly Drive — which Shouhed called “the new Rodeo Drive” on the southern end — but was unable to find a landlord willing to convert retail into a food and beverage space.
“There’s so many deals that are sitting on the sidelines that can’t be done because a lot of these operators, especially the ones that are not super established or financially stable, they are nervous to go through the process of having to get the permits, doing the buildout from A to Z, hitting all the bumps in the road and, of course, the cost.”