Retailers Challenged by Lack of Space, Cost of Construction

A lack of new retail spaces, high construction costs, and competition for what is available are challenging retailers.

Rick Scardino, Principal and Director of Retail, Lee & Associates of Illinois, tells GlobeSt.com he is seeing tenants renew versus relocate due to those factors as well as landlords’ desire to work with high-quality, existing tenants instead of assuming replacement costs.

“We recently had a long-term tenant agree to a substantial $12 per-square-foot rent increase on a five-year renewal, which really is a sign of the times,” Scardino said.

“Landlords are working hard to scrub their rent rolls and offer early termination options to less desirable tenants, freeing up space for higher quality tenants that bring increased traffic and more attractive rents along with them.”

Chris Stewart, EVP, Head of Leasing at PEBB Enterprises, tells GlobeSt.com vacancy rates have been affected by increased construction costs and a slowdown of new development he has been working with tenants to structure build-to-suit deals with slightly higher rents.

“This places the burden of construction costs on us while allowing tenants to come to market with less pressure on their own balance sheets.”

Lisa Christianson, President, Christianson & Company Commercial Real Estate Services/CORFAC International, tells GlobeSt.com that tenants are adjusting their parameters to find ways to grow – in some cases increasing their rent threshold while in other cases they are becoming more flexible on footprints and deal terms.

“In most cases, tenants’ rents are still not high enough to justify the increase in construction costs and the higher cost of debt,” she said.

Tenants in any product type will pay a premium for the most desirable, well-located, real estate, according to Dustin Ballard, President, Head of Leasing at Tricera capital.

“With space that’s already built out tenants are not having to invest large amounts of capital to get open,” Ballard tells GlobeSt.com.

Super Tight in South Florida, New Jersey

Some markets are much tighter than others, Rhett Batanides, MSFP, MPSPM, a Vice President in Foundry’s Charlotte office, tells GlobeSt.com.

“We are going through an experiential renaissance, where many landlords have a varied choice of tenancy,” Batanides said.

“‘Iron sharpens iron’ seems to be the mantra of the times. In the end, the consumer benefits, which should be the goal of every retailer in the first place.”

Jaime Sturgis, CEO of Native Realty, tells GlobeSt.com that retail continues to outperform other asset classes, especially in South Florida.

“Land is scarce in South Florida, so it is not easy to build large amounts of new retail product quickly, which creates a barrier to entry and makes existing product more valuable, especially urban core product in close proximity to significant density, which also increased substantially over the last few years,” Sturgis said.

Dean Tselepis, Managing Director for Newmark, tells GlobeSt.com that the retail market is extremely tight in northern New Jersey.

“New, well-located products get scooped up quickly, with multiple tenants vying for the same spaces,” Tselepis said. “On the other hand, dated and in some cases, obsolete assets are less attractive to these expanding tenants, and they will sit on the market much longer.”

Too Expensive to Build

Jeff Mooallem, COO, Urban Edge Properties, tells GlobeSt.com that in the supply-constrained, first-ring suburbs of major cities, it is nearly impossible to justify building a new retail construction project today.

“We don’t see that changing, due to the combination of high land prices, difficult entitlements, and higher construction and borrowing costs,” according to Mooallem. “This is a real advantage for our portfolio of Northeast infill assets, and it’s allowing us to curate a better mix of tenants for the communities we serve.”

Ed Coury, Senior Managing Director at RCS Real Estate Advisors, tells GlobeSt.com, “We are all aware of the financing challenges and costs to build, including land costs at historic highs in many ‘hot’ markets.,

“With a dearth of new retail space hitting these ‘in demand’ markets, the obvious has unfolded with tight retail driving rents up and competition between retailers for space at unusually high levels.”

Not so much in New York City, though, where Mendy Katz, President, Monarch Estate Services, said there is block after block of vacant storefronts all along 5th and 6th avenues.

“More than half of Manhattan has retail space available on the ground floor,” Katz said.

“If you walk out of your office and turn the corner, ‘For Rent’ signs are abundant. Many owners are converting retail space to storage and residential. That would decrease the retail space available and make it a tight market due to conversion – not due to the retail market sales and lease up.”