New Wave of Retail Tenants Filling Power Centers

Empty Big Boxes Getting Help from Unexpected Quarters as Dollar Stores, Warehouse Grocers and Large Discount Retailers Like Wal-Mart and Target Take Space.

During the recession, hundreds of retail power center tenants went dark, putting millions of square feet of vacant space back on the market. Store chains like Circuit City, Borders and Mervyns went bankrupt, while others such as Best Buy and Linens N Things, sharply reduced their number of stores, leaving vacant holes in many shopping centers. 

Power centers, unenclosed retail centers ranging in size from 250,000 square feet to 750,000 square feet that typically contain three or more big-box retailers along with smaller infill retailers, saw vacancies spike above the total retail vacancy rate from 2008 to 2010. 

Since then, power centers have experienced a steep drop in vacancy rates as the flood of store closings has slowed and a new crop of tenants has stepped in to occupy empty big box and in-line store space. 

“Power centers have had an extremely outsized recovery,” observed Ryan McCullough, who presented CoStar’s Third-Quarter 2013 Retail Review and Outlook with Suzanne Mulvee, director of U.S. research, retail. “The complexion of the power center real estate market is certainly changing, and the base fundamentals have really improved rapidly.” 

By the end of third quarter 2013, the vacancy rate for national big-box power centers had fallen to below 5.5%, from a high of nearly 8% in 2009. The total retail center vacancy rate has declined more gradually, from a high of about 7.5% in early 2010 to below 7% at the end of the most recent quarter. 

Many of the retailers taking space in power centers have traditionally leased space in community shopping and other smaller types of spaces, but are increasingly eyeing big-box space, especially in centers with good traffic and demographics. 

While the leasing activity varies by market, dollar stores have taken up vacancy slack in many power centers. In other markets, tenants like TJX Cos., Ross Dress for Less and various soft goods retailers have been especially active. 

For example, western and work wear retailer Boot Barn recently opened a store in a former Circuit City space west of the Greeley Mall in Greeley, CO. The retailer has occupied shuttered Circuit City stores in several markets. 

Eric Tumbleson, senior associate with Colliers International in Las Vegas, said he expects an influx of tenants will continue to move into abandoned big boxes. 

“But if you’re asking me, am I advising my investment clients to buy power centers? No way. Stay away, unless you’re the type of investor or developer that can reposition these centers into a different use. The problem is, you can’t acquire these centers at a significant enough discount so that it makes sense,” Tumbleman said. 

Most owners also don’t want to go through the costly and time-consuming process of redevelopment or repurposing of the space, agreed Peter Sengelmann of Pinnacle Real Estate Advisors in Denver. “They’re just getting more creative in the ways they’re filling the (empty spaces) with tenants,” he said. 

Within the highly competitive retail market, power centers appear to be stealing some of the tenants from neighborhood centers, especially their grocery store anchors. 

“We’re seeing a lot of expansion from the Wal-Marts, Targets, warehouse clubs that are stealing some of the thunder from neighborhood centers,” said CoStar’s McCullough. As a result, it’s only over last couple of quarters that CoStar has started to observe any material vacancy compression within neighborhood centers. 

On top of that, the mom and pop stores that occupy in-line spaces of neighborhood spaces are still having creidt issues, unlike the power centers, said Mulvee. 

“Power centers almost exclusively lease to national credit tenants that have better access to capital today,” she said. “For a full recovery in neighborhood centers, you need those smaller in-line tenants to come back. In stronger markets like Boston, we’re starting to see mom and pop startups opening new storefronts.” 

Overall, CoStar’s recent research shows that retailers and tenants are seeing healthy sales, making money and seeing higher productivity from their stores. An index created by CoStar measuring sales per square foot for different types of retail center shows that power center sales at up some 15% from the recession more than six years ago. 

There’s also hope for the recovery of neighborhood centers in the CoStar index, which shows, despite the weakness of smaller tenants, that per-square-foot sales are up 25% over the same period. 

“With strong productivity by neighborhood center tenants, once the flow of credit is restarted to those smaller tenants, it will set the stage for a fairly strong recovery,” McCullough added. 

Announced store openings are picking up in 2013 and closings are down. Overall absorption is getting stronger in retail across the board. A number of retailers have announced plans to open a significant number of stores, many of them in power centers. 

So far in 2013, Bed Bath and Beyond leads with about 2.25 million square feet of new stores announced. Others run the gamut of the retail spectrum, from value retailers like Big Lots to luxury tenants such as Bloomingdale’s and Nordstrom Racks. 

“We’re seeing a more broad-based group of tenants seeking space, thus, we’re at an inflection point in the market and 2014 will be a much stronger year,” Mulvee said. 

Although retail numbers have been choppy in recent quarter, the four-quarter trailing average shows that momentum for demand is building, with the highest point in net absorption since start of recovery. 

“We’re now averaging 19 to 20 million square feet of net absorption per quarter, the best we’ve seen in a number of years, and we think it’s going to pick up,” said McCullough. “We’re still below the 50 million square feet of 2007, but the trend is pointing to an increased rate of recovery.” 

Source: CoStar Randyl Drummer November 12, 2013
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