The traditional allure of the suburbs for retailers held that retail followed rooftops, hoping to fill commuters' needs for services in their off-work hours. With even more of the workforce now spending less time in downtown offices, retailers are putting a greater emphasis on growth in suburban markets.
"Instead of it being a dinner and weekend market, you've got a really captive audience throughout the day with people not commuting, which is really helping to bolster the retail in the suburban markets," says Tyler McRae, SVP and co-market lead for SRS Real Estate Partners.
Tyler McRae
Especially in the fast-growing Sunbelt markets, that has created some challenges. Strong competition for retail space and the shortage of new locations, coupled with persistently high construction costs, have resulted in a suburban supply and demand imbalance, and in higher rents and slower deal cycles.
Retailers Must Adjust
With rental rates increasing, suburban retailers have been forced to revisit their expansion strategy.
"Tenants have had to pivot their internal pro formas as today's market rents have surpassed their historical rent ceilings," McRae says. "They previously had zero willingness to exceed those and are now having to get creative."
Apart from cost-cutting and raising prices, some have turned to longer lease terms, which is more favorable for developers for lending costs and exit strategies. Others, notes John Artope, SRS Real Estate Partners EVP and market leader, are reducing their footprints or adding services such as drive-thrus or pick-up windows that rely less on internal space.
John Fahey, SRS Real Estate Partners SVP and co-market leader, says that the high occupancy and demand are forcing newer retail concepts to scale down their initial rollout, allowing businesses more time to better understand where their concepts will stabilize from a sales standpoint.
John Fahey
"Essentially it's relaying back to their investors that maybe it's not the same typical velocity that you've seen five to 10 years ago," he adds. "It's not just the lack of availability or appropriate locations, but it's also a little bit of the same construction costs that are hurting developers and landlords."
What's Hot vs. What's Not
Experiential retail continues to be a hot trend. According to Fahey, entertainment brands like TopGolf and PopStroke have replaced the traditional movie theater offerings as the go-to for family entertainment. Restaurants have leaned into experiential offerings that are a little bit bigger, bolder and more high-end. And the fitness segment, both small boutique and big box concepts, is doing extremely well, benefiting from the post-pandemic return to socialization.
McRae expects to see continued closures among bank branches and drug stores, with retailers and restaurants repurposing old bank pads, while healthcare tenants are retrofitting former drugstores to utilize the existing improvements. He notes it's part of a bigger trend, with the medical world "really starting to impede and wanting to take over a range of retail locations."
John Artope
"I think the medical and retailer segments are becoming a little bit more connected these days than they have been in the past," says Artope. "When new hospitals open in some of these suburban communities, they're actually becoming a big driver for the daytime population and that's creating the demand for additional retail space."
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Brian A. Lee
Brian A. Lee is an Atlanta-based freelance writer and former editor of Western Real Estate Business magazine. The Wake Forest and University of Georgia graduate has covered commercial real estate since 2000.
