Does the increase in rental activity signal a recovery for the retail sector?

Commercial properties of all types, from anchored malls to grocery stores to enclosed regional super malls, have seen an explosion in rental activity over the past 12 to 18 months. And even the most pessimistic real estate experts say that the flow of transactions reflects the recovery of the retail sector.

Preliminary data for the first quarter indicates that retail tenants absorbed 91 million square feet nationwide in the prior year period, according to Marcus & Millichap. The real estate company says March 2021 to March 2022 was the strongest 12-month period for absorption in nearly five years.

“There just isn’t enough vacant retail space,” says Drew Barkett, executive vice president of DeBartolo Development. “It’s becoming a bidding war there.”

DeBartolo currently owns two very different commercial properties: Ka Makana Ali’i, an 859,000 square foot property. regional shopping center in Kapolei, Hawaii, on the island of Oahu; and Seven Oak Plaza, a 78,0000 square foot. neighborhood center in Wesley Chapel, Florida, outside of Tampa.

“Ka Makana Ali’i is crushing it,” Barkett says, adding that the center is more focused on day-to-day needs and year-round residents instead of relying exclusively on tourism. Anchored by Foodland Farms and 24 Hours Fitness, the project offers more than 120 shops and restaurants, as well as a theater, lifestyle center and limited-service hotel.

Ka Makana Ali’i rental is managed by JLL’s retail agency rental group, which has seen rental activity increase by more than 600% across its portfolio of 80 centers from 2019 to 2021. Last year, the 25-person team closed nearly 200 new transactions across all center types and property classes.

“The leasing activity our team is seeing signals a stronger retail recovery,” said Paul Chase, executive vice president of retail agency leasing for JLL. “Retailers have gotten smarter throughout the pandemic.”

The company’s fourth quarter 2021 U.S. retail outlook reports an increase in occupied retail space totaling 76.1 million square feet, a significant reversal from the 28 million negative square feet posted in 2020.

“Retail leasing activity is incredibly strong at our properties,” said Daniel Goldware, senior vice president of leasing for Trademark Property Company, which owns 17 mixed-use properties totaling approximately 10.7 million square feet at across the country, including the prestigious Galleria. Dallas and First Street Napa. “The pandemic has proven that the physical store is more valuable than ever.”

In a recent McKinsey & Co. survey, senior executives from 10 of North America’s largest retailers said they experienced significantly higher e-commerce growth in retail areas with a physical presence compared to those without physical stores. Additional research from McKinsey indicates that 60-70% of consumers across all categories research and buy both in stores and online.

In-store retail sales, which exclude online purchases and spending at restaurants and bars, accounted for nearly two-thirds of all retail sales in March, the highest proportion this year, according to Marcus & Millichap. The company says the 2.1% rise in in-store spending recorded last month suggests an increase in foot traffic in physical stores as health conditions improve and mandates are lifted.

“People want to be outside,” says Barkett of DeBartolo. “They want to see and touch items in the store. They want to enjoy dinner with their friends and family.

Data provides more certainty

Retail tenants today are approaching leasing differently than they did before the pandemic. Instead of blanketing a market with dozens of new stores, these companies rely on data to guide their leasing decisions. This more methodical approach means fewer, more targeted stores that cater to their customers. The sector was also helped by strong demand from health and wellness tenants for traditional retail locations.

“Tenants now have access to data that tells them which locations are going to be good for them and which aren’t,” says Sandy Sigal, chairman, president and CEO of Woodland Hills-based NewMark Merrill Companies. California, which owns and manages more than 10 million square feet of retail assets in 85 cities. “This certainty has made them more confident in their rental decisions. Last year was a record rental year for us, and this year will be another record year.

In the past 12 months, more stores have opened than closed, according to CBRE. In fact, after 70 retailers filed for bankruptcy in 2020, the retail sector is now seeing the lowest levels of bankruptcy filings in the past five years.

Of NewMark Merrill’s approximately 2,000 tenants, the company has lost 60 during the pandemic, or about 3%. “What does this tell you about retail tenants and their incredible restlessness to adapt and survive?” Sigal said. “Frankly, I’m shocked at how good entrepreneurs they are.”

Rental gaps widen

For retailers and restaurants that were already struggling before the pandemic, COVID-19 was the proverbial straw that broke the camel’s back. Sigal estimates that at least half of tenants who left its properties would have closed regardless of COVID-19.

Most owners view this “elimination” as a positive. They were able to fill their centers with new, stronger tenants and negotiate leases at higher rental rates than previous leases.

Consider Phillips Edison & Company Inc.: The Cincinnati-based REIT’s portfolio, which consists of 268 properties totaling approximately 30.7 million square feet in 31 states, hit record occupancy at the end of 2021, according to financial documents.

The occupancy rate of the PECO leased portfolio increased to 96.3% at the end of 2021, compared to 94.7% at the end of 2020. while online occupancy totaled 92 .7% against 88.9%.

In 2021, PECO executed 1,135 leases (new, renewal and options) totaling approximately 5.6 million square feet. By comparison, it signed 861 executed leases totaling about 4.7 million square feet in 2020.

CEE saw its rent spreads increase significantly in 2021. New leases jumped 15.7%, while renewals increased 8.1% for renewal leases (excluding options). Combined new and renewed leases increased by 10.1%.

“As a grocery-anchored mall owner, we weathered COVID better than expected,” says Ron Meyers, senior vice president of leasing at PECO. “We are seeing strong demand from a wide variety of tenants and uses. Medical tenants and restaurateurs are particularly active.