The Real Story Behind Retail Vacancy

The retail vacancy rates is continuing to decrease thanks to healthy leasing activity throughout Southern California. According to a new report from NAI Capital, the retail vacancy rate in Southern California was 4.6% in the first quarter, down 20 basis points over last year. Los Angeles led the gains with a 40 basis point decrease in vacancy rates at 3.6%, and Orange County followed closely behind with a retail vacancy rate of 3.7%. The leasing gains are surprising considering the unfavorable narrative about the retail market. To find out more about what is driving activity and why retail is getting a bad rap despite strong leasing activity, we sat down with John Cserkuti, EVP at NAI Capital.

GlobeSt.com: Retail vacancy rates are down again for the first quarter. What is driving leasing activity in this market?

John Cserkuti: For as long as I can recall, consumer confidence played a big part in retail spending, so when consumer confidence went up so did retail spending. Consumer confidence peaked last year, and we are still at high levels. As long as that number is up, consumers are spending quite a bit of money on retail products, so now it is really coming down to what are people buying. Ecommerce is playing a big role here, but there are things that ecommerce will never be able to replace—at least not for sometime.

GlobeSt.com: What types of tenants have been the most active?

Cserkuti: We are seeing the most growth from food. Food has been and will continue to be the leader in growth in the retail segment, and that can be quick-service restaurants or full-service restaurants. Food has always done well, and a lot of new developments that we are seeing is heavily based in the food segment. The next is service-oriented concepts. There is still demand for nail salon users, dentists, dry cleaners. I like to call it the usual suspect line-up. You will see those in most retail centers. The third element is experiential factor. That is the buzzword now, and it is something that ecommerce can’t take away. People want to go out and they want to have an experience. In the food segment, for example, you have to have good food and good service, but you also have to bring in that third segment through the atmosphere. If you do that right, people will come and they will keep spending money.

GlobeSt.com: The headlines are that retail is struggling, but the numbers aren’t backing that up. Why are we seeing this dichotomy?

Cserkuti: It is the more traditional retail that we have seen a fall off on, like Toys R Us and some of the more apparel stores. The media does push it out there, and some of it is just standard operating for businesses. Retailers are always shutting some stores down. So, you have to take that hand-in-hand. You will continue to see some of that, but I think the successful retailers out there today are shifting their prototype. You are seeing boxes that were once taking 40,000 square feet are now taking 20,000 to 25,000 square feet. There are still expansions, though. I did a Michael’s deal recently and a Nordstrom Rack deal. Those companies are expanding. TJ Maxx is another company that is expanding. Those mid box apparel users are still definitely doing deals.

GlobeSt.com: There have been some big retail closures. Do you think that there is enough demand to backfill those spaces and keep vacancy rates low?

Cserkuti: There are other uses, like the experiential. Landlords are asking what they can do to bring people in, so you are seeing more trampoline park pop-ups that occupy some of these larger boxes. Fitness has also been popular to backfill these spaces, and gyms are still very much expanding. Kids play spaces and comedy clubs are other tenants that are backfilling big box spaces. You are seeing more concepts like that.