Continued
healthy demand for retail space is driving strong occupancy increases for many
of the nation’s shopping center landlords and is even beginning to show up in
rent increases.
"We’ve
seen occupancy increase for a couple of years now and landlords are showing
increasing net operating incomes and some are starting to see rents pop,” said
Ryan McCullough, senior real estate economist CoStar Group (PPR division),
speaking at CoStar’s 2013 Q3 Retail Review & Outlook webinar last week.
"However, rents for most retail space are still low to the point that they
are not an undue burden on the tenant," a positive for both sides, said
McCullough.
In
fact, he added, the decline in vacancy appears to be accelerating. Net
absorption of retail space reached its highest point since the start of the
recovery with 19 million to 20 million square feet of net absorption per
quarter, the best results in years.
McCullough
said there is still plenty of upside for quarterly net absorption, which remains
well below the height of the market in 2007 when national net absorption per
quarter was approximately 50 million square feet.
With
the increasing net absorption, retail rents are even starting to tick up.
"We’re
just talking about a 0.8% gain over the year, not a huge number,” McCullough
said, but also noting that some of the stronger U.S. markets are seeing retail
rent gains of from 4% to 5% and even higher.
McCullough’s
comments on the CoStar webinar are backed up by other comments made by senior
executives for some of the largest publicly held retail REITs in their third
quarter earnings conference calls.
Demand
Coming from National, Regional Tenants
“We're
still not seeing the formation of new mom-and-pop businesses; and most of our
new leases are coming from national, regional or franchise operators. These
tenants want to be in Weingarten properties because our top tenants,
supermarkets and discount closing retailers, continue to drive sales and
traffic to our centers.
Rent
growth for new leases continues to accelerate. We produced an increase of 9.4%
in the third quarter and 12.6% year-to-date. We do see leverage slowly shifting
to the landowner, particularly in urban markets that have more depth of
retailer demand.
Johnny L. Hendrix, Chief Operating
Officer and Executive Vice President of Weingarten Realty Investors
New Retail
Outlet Concepts Spur Growth
We
love all the new outlet concepts that are coming. There are several that have
announced plans to expand, such as Francesca's, Asics, Talbots, Vince Camuto,
Cache. We're also working with folks like Helzberg Diamonds, Joe's Jeans,
MaxStudio, Theory, Andrew Marc. There seems to be an ever-increasing list of
high-quality designer and brand names that want to enter or expand in the
outlet space.
Steven B. Tanger, President and CEO of
Tanger Factory Outlet Centers
Demand
Driving Tenant Turnover
The
demand we're seeing is from domestic retailers looking to expand the existing
footprints to scale up new concepts, international retailers seeking to enter
or expand within the U.S. market and the traditional destination retailers that
are coming into the mall.
It
is also an opportunity for us to replace lower productivity tenants with a
higher productivity tenant, thereby supporting a continued growth in sales at
the malls.
Sandeep Lakhmi Mathrani, CEO of
General Growth Properties
Occupancy
Increases Up for both Anchors and Small Shops
Quarter
over last quarter, overall occupancy was up 30 basis points pro rata and 20
basis points gross. Anchor occupancy increased 40 basis points to 97.4%; small
shop occupancy was up 40 basis points to 84.7%, an 80 basis points increase
from third quarter of 2012. The increase in small shop occupancy continues to
be driven by positive net absorption from the disposition of riskier assets.
Given
that demand for large boxes is very strong, and occupancies are high for this space
across our sector, Kimco is benefiting from this trend through higher rents for
a larger portion of our portfolio. Additionally, we continue to see the
advantage of old leases in our portfolio coming to the end of their term.
Conor C. Flynn, Chief Operating
Officer and Executive Vice President of Kimco Realty
Retailers
Making Up for Over-Reacting Three Years Ago
You
know everybody probably overreacted in terms of closures in 2010. And so a lot
of [what] you see is a lot of these national guys who are really scrambling to
find space.
There
has been a real strong increase really across the board and demand from
national tenants. A good example is Starbucks as an example. Eighteen months
ago people would say 'they're done, they’re closing stores, they’ve got too
many stores.' Now Starbucks is opening lots of stores or re-opening stores that
they [had previously] closed.
John
Kite, CEO of Kite Realty Group Trust
Lease Terms
Also Becoming More Landlord Favorable
On
a same-property basis, the operating portfolio is nearly 95% leased at the
close of the quarter, and shop space occupancy stands at roughly 89%, the
highest it's been since 2008 and a 130-basis-point improvement over 2012. With
this increase in occupancy, aided by strong tenant demand and limited new
supply, we continue to gain pricing power. Rent growth returned to double
digits this quarter. Average rents for side-shop tenants continue to trend
upward and are now 34% above the trough.
And
not only are starting rents improving, but we're also seeing more favorable
lease terms as a whole, including better rent steps and more aggressive
commencement dates.
Retailers
are acting on this positive sentiment. Many are making significant investments
in their current spaces, as well as in new ones. Given the underlying strength
of tenant demand, we see no slowdown in the positive momentum in all of the key
operating metrics.
Brian
M. Smith, President, Chief Operating Officer of Regency Centers
8% Rent
Increases in Core West Coast Markets
We
have seen a considerable increase in retailer demand across each of our core
markets this year, coming from a broad range of large national retailers, as
well as regional and local tenants. Needless to say, we have been working very
hard to capitalize on the increased demand and as a result, our overall
portfolio occupancy has risen to 95.3% as of September 30.
In
terms of same-space comparative numbers, cash rents increased by approximately
8% on average for the third quarter.
Richard K. Schoebel, Chief Operating
Officer of Retail Opportunity Investments. ROI owns 51
shopping centers encompassing approximately 5.5 million square feet of gross
leasable area geographically diversified across the West Coast.
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