Store closures spell opportunities in tight market

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In a tight market, vacant spaces in desirable locations will move quickly. Murdoch’s Ranch and Home Supply is one of the most active retailers for these large spaces. (Courtesy Murdoch's)

Despite national headlines of store closure and, locally, the bankruptcy of Sports Authority, the Denver retail real estate market has been largely unaffected. What’s more, even with the potential 600,000 square feet of vacant space coming back on the market from Sports Authority locations, many in retail real estate – landlords, owners, investors and tenants – could benefit from new opportunities.

“Sports Authority closures will not have a significant impact on the Denver metro retail real estate market, in my opinion,” said Mary Beth Jenkins, president of The Laramie Co. “This is not a real estate issue, this is a business issue. They failed because they couldn’t compete. It’s not because we have an issue with our demographics. We are an outdoor wonderland, and sports stores should be able to survive here.”

Overall, the Denver retail market is enjoying strong net absorption, with 397,878 sf absorbed in the second quarter, up from 259,717 sf in the first quarter, according to research from Cushman & Wakefield’s 2016 Q1 report.

“Even with the big-box closures, the general vacancy rate of retail product in Denver continues to decline,” said Jon D. Hendrickson, managing director of capital markets with Cushman & Wakefield. In the second quarter, overall vacancy was 7.1 percent – down from 7.3 percent in the first quarter and 0.5 percent lower than the U.S. major markets average of 7.6 percent, he said.

Other telling indicators include the city’s strong demographics, limited new supply and demand for Class A product. However, retailers are being methodical in the way they process new sites and are requiring more criteria before entering into negotiations, said Scott Crosbie, partner at Crosbie Real Estate Group LLC. With construction costs and higher taxes, tenants are more conservative with their estimates and sale volume projections, which is affecting B and C sites and causing some to sit vacant or be overlooked all together, he said.

“The thing is, if they’re in good locations with good demographics, the spaces will go,” said Susan Karsh, managing director with Newmark Grubb Knight Frank. “The more secondary locations are going to be more problematic – but they always are, so nothing is new.”

The State of Retail

While consumer demands change, bankruptcies are inevitably part of the retail environment. “The most recent bankruptcy of Sports Authority was only one company, not a string of business failures due to a major market disruption,” said Crosbie. “One-off bankruptcies will inevitably happen in any market and are a part of how an industry grows.”

In fact, these current announcements are not much different from previous decades.

“Ten years ago, the concerns were Blockbuster, Circuit City, Radio Shack, Albertsons, etc.,” said Hendrickson. “Today, we are encountering similar concerns over Sports Authority, the ‘Amazon impact,’ the changing grocer landscape, etc. The beauty of retail is that the location is not generic and the space is not a commodity. Retail always reinvents itself and the latest and greatest concepts will see the fundamental strength of a space or location. Investors are targeting shopping centers with that long-term vision.”

Two factors often blamed for today’s changes go hand-in-hand: the internet and millennials. Millennials – the first generation to grow up with online shopping – demand that retailers provide value, convenience, support and an experience that motivates them to visit the brick-and-mortar location, said Crosbie. Retailers must also provide consumers with support for online sales.

Some sectors enjoy more insulation from internet competition than others and are doing well because of this. The most insulated sectors include entertainment, food and retailers that sell unique products or products that require physical interactions before buying – for example, trying on ski boots or sitting in a chair to determine the level of comfort, said Jenkins.

When retailers adapt to provide consumers with unique experiences, their real estate needs adapt alongside. Retailers are displaying a thoughtful mindset when considering expansions, which requires landlords to be more creative and flexible in order to make deals, said Crosbie.

“We call it the ‘Recession Hangover,’ ” he said. “We see it as a good thing for the overall market. Landlords and developers will just need to understand what retailers want and expect as they go out and evaluate projects.”

Vacancies

While vacancies can be challenging, there are major opportunities for landlords in this predicament. When filling empty stores, landlords have an opportunity to raise rents, increase shopping center traffic and create a greater experience for consumers.

Often during lease up, landlords offer incentives and low rent to anchors or department stores under the assumption that the retailer will bring traffic to the center. So if this anchor tenant leaves, the landlord has the opportunity to bring in another tenant who could be a much better rent payer, said Karsh.

Of all the vacant space, the Class A product in desirable locations will move quickest, often finding retailers that can take the entire space. For the largest vacant spaces – 50,000 sf or bigger – Big R, Hobby Lobby, and Murdoch’s Ranch and Home Supply are some of the most active, said Karsh.

Sports Authority, which had 600,000 sf spread out over 30 locations, is looking at vacant boxes that average about 30,000 sf, said Jenkins. “This is a very manageable size store to release,” she said. It is easier to subdivide a 30,000 sf store than it is to divide a 100,000 sf, and there are more 30,000-sf tenants out there than larger tenants. “So, for the most part, the releasing of those stores may be an opportunity for both the retailer and the landlords of those shopping center.”

In this 30,000-sf range, off-price retailers, such as TJ Maxx and Ross, are active, as are grocers, gyms, furniture users, distribution retail and some soft goods.

When landlords are determining ideal prospective tenants to cultivate or maintain a strong tenant mix in their centers, sporting goods providers stand to benefit from Sports Authority vacancies because landlords know they’d fit well in the desired tenant mix.

Other box retailers that had been unable to penetrate certain trade areas will try to take advantage of the A and B locations as well, said Crosbie.

For C product in less desirable locations, landlords may need to get creative. “That could mean an office user or something that’s not just pure retail – something that doesn’t need the kind of traffic that the traditional box national would take,” said Karsh.

We might begin to see retail in the front and storage in the back, a “retail mullet,” as Crosbie calls it. Or shopping center developments may be scraped for new mixed-use development, which would be far more expensive than repurposing the space.

The other option is dividing the space for multiple tenants. Many landlords will hesitate to do this because dividing boxes is expensive, said Karsh. “They’ll divide it if they have to, but sometimes I’ve seen landlords tell the tenant to take the entire space at a much lesser rent just so they didn’t have to go through dividing it,” she said.

However, every space is unique and splitting a large vacant space can have serious payoffs, said Jenkins.

“There’s always a cost of demising the space, but smaller spaces dictate larger rents,” Jenkins said. “So the payback should be there. And tenants are downsizing, so the more reasonably sized spaces you have, the easier it’s going to be to release them in the future. It’s really a long-term investment when you demise a space.”

Featured in August 2016 issue of Retail Properties Quarterly.

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