Are Retailers Making Up for Over-Reacting Three Years Ago?

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.

Copyright © 2013 CoStar Realty Information, Inc.  All rights reserved.