Big Box Vacancy Greatest Threat to Retail

CHICAGO—Retail may be the most challenging sector for investors. E-commerce, new patterns of consumer behavior and store shutdowns means buyers have to very thoughtful as they evaluate properties. And according to Real Capital Markets’ May 2018 Retail Investor Sentiment Report, the shutdown of Toys R’ Us and so many other well-known retailers has changed investors’ views on the threats to retail investing.

Potential buyers now consider big box vacancy, cited by 39% of those surveyed, the greatest threat. In 2017, it was viewed as the third greatest threat behind changing consumer buying habits and e-commerce.

But a significant number of investors feel confident that they have hit upon the right strategies. As reported in GlobeSt.com, almost 70% of investors surveyed by RCM categorize themselves as net buyers with only 11% taking a wait and see attitude. And 48% of investors surveyed still consider grocery-anchored shopping centers the best investment, but tenant rosters are examined with more care than ever.

“Many retail investors have told us they are looking to create a tenant roster that is e-commerce resistant,” Tina Lichens, chief operating officer, Real Capital Markets, tells GlobeSt.com. “One of the ways in which they are doing that is to move toward more service-oriented tenants, including those in healthcare. Natural synergies can be created by building or enhancing a tenant base that includes space leased to doctors, physical therapy centers, medical equipment and supply stores and even vitamin shops or pharmacies. Investors like centers where there is the ability for tenants to draw off one another. A concentration of healthcare related tenants can accomplish that.”

Filling spaces with such providers may once have been considered unusual, but many landlords have found it beneficial. Well-established healthcare providers have investment-grade credit, a status some retailers can’t meet, and a willingness to spend their own resources to create a great environment for their patients.

“We’re seeing this at retail centers across the country, as vacated or underperforming big box spaces are aggressively marketed to healthcare tenants that could absorb all, or a significant portion, of that space,” Lichens says. “These transactions fulfill a landlord’s need to lease space, and a healthcare provider’s need and strategy to expand its reach into a community. It’s a situation where no one loses.”

“Many healthcare related tenants, including those with equipment requirements and those that require significant build-out, are more likely to be long-term tenants, with attractive renewal options,” she adds. “This provides a level of strength and stability for investors.”

And such stability could become more important in the next few years. Economic growth has continued for much longer than previous expansions, and everyone who invests in commercial real estate keeps a close eye on financial indicators, trying to discern when things will start going south.

“One of the natural responses to an economic slowdown, whenever it would occur, is that the majority of investors will seek to reduce their risk exposure,” Lichens says. “They may do so at the expense of investing in under-performing retail properties that are not well-located in a market or trade area.  In contrast, it will make core, well-located, class A properties even more valuable and in greater demand.”