Class A Retail Spaces in High Demand as National Chains Seek Smaller Footprints

In one analysis after another, retail has been one of the strongest property types, with significant improvements over the last six months. Yields are “well placed relative to the risk-free rate in many markets and rental growth has reemerged in some markets after a multi-year absence,” said an Oxford Economics report. “Stock per capita is reduced in many areas while household incomes continue to recover, so there may be some pricing power for landlords.”

“There’s been a lot of data and reporting over the past year about limited space in Class A centers squeezing out smaller local chains, and in my experience, that’s exactly what’s happening,” Jared Rothkopf, a CRE attorney at Polsinelli, told GlobeSt. “Landlords want high credit tenants who can provide better security packages than local startups. Startups need to prove their concepts in less attractive spaces and trade up for better space after they’re more established.”

“For some reason, the retail spaces are moving quicker than anyplace else,” said Michael Thom, an attorney in the business and finance department at Obermayer who often works in Bucks County. “I do think there are places where small mom and pops have issues. As the smaller tenants are coming up for renewal, I’d think more landlords would talk about increasing the rent.” If they can’t pay, there’s now an opportunity to attract a national tenant that can afford higher rates and boost the value on a triple net lease because it will also come in with stronger credit.

One reason bringing in bigger names is possible is that many national chains are considering smaller spaces for new strategies that combine brick-and-mortar and e-commerce. “They don’t need the bigger spaces anymore,” says Philippe Lanier, principal at EastBanc, which owns a lot of retail space in Georgetown.

But while they have more money, there are other factors Lanier looks for. “I look for successful merchants, somebody who is managing the shop who understands the customer and providing people with a reason to come in and make a purchase,” he said. “Small businesses tend to be better at that than national chains. They need a business that actually does the sales that pays my debt. Then there are national brands that understand the individual [consumer] and are doing really well. They’re able to tell a story in a way that mimics being a good merchant.”

And the nationals have the money that smaller retail building owners need for bringing in a new retailer. “If you’re a mom-and-pop and own one or two or three buildings, which are part of the urban fabric, having lived through the last four or five years, you’re probably not sitting on a lot of cash,” Lanier says. “You can only make a deal with the brand that has the money to pay for the transaction to build out their space.”

In some cases, the smaller retailers are critical to the success of name anchors. Jeff Edison is the chair and CEO of Phillips Edison & Co., which specializes in top grocery-anchored shopping centers. it has 300 of them across 31 states. “A lot of our job is to make sure the small store space adjacent to our number one or two grocer is maximized,” told GlobeSt.com.

“Are the nationals taking over the locals? It doesn’t really operate that way,” Edison said. “What happens is the good retailers overtake the less good retailers and unfortunately there are a lot of local retailers that aren’t that great.” But often the company needs the local restaurant or merchant that has tapped into that area. “They have the best sales.” And that means bringing in the shoppers that let everyone succeed.