Research & News

With workers only venturing into the office a few days a week, it’s no surprise that spending is being re-directed to retail districts closer to where people live, according to a new report from CBRE. This has resulted in an uptick in CBD retail availability in US central business districts, which now exceeds that of suburban space for the first time since 2006.Suburban availability has fallen, according to the report, upending a well-established pre-pandemic trend whereby urban and suburban fundamentals were closely correlated, the report said.

Analysis of consumer data from Placer.ai suggests that urban and suburban malls can continue to coexist as they recover from the effect the Covid pandemic had on shopping patterns.“ Foot traffic data indicates that there is plenty of room in the retail space for both types of venues,” according to that report.Still, Matt Hammond, Partner / SVP Brokerage, Coreland Companies, tells GlobeSt.com that downtown environments have faced a variety of post-pandemic challenges significantly affecting CBD shopping patterns.

“Retailers and restaurants need daytime and nighttime traffic,” Hammond said. “They depend on employees going out to lunch, as well as professionals living in the area to enjoy evening dining, events, and shopping. “This flight from CBDs, as well as ongoing security concerns in prominent areas, has deterred retailers and restaurants from expanding. There was a time when downtown had the best new restaurants and most unique environments, but this is no longer the case.” For the past decade, opportunistic owners of suburban centers have invested in experiences and creating destinations, he said.

“Elevated design with a larger focus on outdoor dining areas, community art, and gathering spaces. Recognizing that restaurants can be a significant draw, they often have a distinctive design and are often centrally positioned or clustered to create synergy.”Simon Malls in New England has made similar changes.Laura Schwartz, Simon Regional Vice President—Leasing New England, tells GlobeSt.com that Simon has adapted to a shift in consumer desire for experiences at the malls and outlets other than shopping.“With workers operating on fully remote or hybrid models, they’re seeking convenient weeknight and weekend activities for the entire family much closer to home than previously,” Schwartz said.“We’ve implemented robust programming schedules across our suburban centers in the Greater Boston area that include free and low-cost events appealing to a variety of audiences which have seen extremely successful turnout–for example, at Burlington Mall, visitors have enjoyed Salsa dancing lessons, fitness classes, a cornhole league, and special events throughout the summer at The Park, the shopping center’s new green common space. “Accommodating an increased demand for sit-down food & beverage experiences has also been paramount as we have eagerly acclimated to this shift.”Molly Morgan, Executive Vice President-Retail Leasing at JLL, tells GlobeSt.com that as millennials and Gen Z start families of their own, they are leaving in-town neighborhoods and heading to the suburbs. “However, they still want the great chef-driven restaurants and trendy retail they had in town.  Developers have created these mixed-use/ suburban downtown areas – such as at Halcyon in Alpharetta, Ga. and Birkdale Village in Huntersville, N.C. – that create an experience these hip retailers and restaurants are looking for, and they are seeing great success.

‍It’ll ‘Never’ Be Five Days a Week

‍Gary Glick, partner, Cox, Castle & Nicholson, tells GlobeSt.com that although workers are slowly migrating back to in-person work, it has been slow and will probably never be back to five days a week. As a result, retail businesses, especially restaurants, fast food providers, bakeries, and coffee shops located in downtown business districts have been significantly affected.“In many cases, these businesses have failed due to the lack of a customer base,” Glick said.“ Whether this business comes back will depend greatly on how quickly, if ever, business workers return to their offices, or whether many downtown office buildings are turned into multifamily uses.“The corollary is that suburban retail is doing much better due to [remote business workers]. The longer workers remain in their suburban neighborhoods working remotely, the greater the number of shoppers for local businesses, especially food. “This is a situation that will play out over the next few years as the downtown office markets stabilize and reach what will be a ‘new normal.’ ”Brandon Svec, national director of US retail analytics at CoStar Group, tells GlobeSt.com, “Suburban retail has benefitted from a few factors including post-pandemic migration patterns, the growth of the (increasingly suburban) millennial household, and the significant rise in spending seen coming out of the pandemic. ”With new supply still minimal and strong demand from tenants across a range of sectors, suburban availability rates have declined to a more than 15-year low of 4.6%, a contraction of over 1.5% since 2020 alone, Svec said. One often overlooked factor, especially in light of recent Bed Bath and Beyond and Tuesday Morning headlines, has been the pullback in tenant move-outs (or store closures), Svec said. “The pace of tenant move-outs has declined to an annual rate of 222 million square feet per year since the start of 2021, a significant reduction from the over 330 million square feet of annual tenant move-outs recorded from 2017-2020.”

‍Consumers ‘Cocooning’ Even More

‍Rob Ury, Partner, Beta Agency, tells GlobeSt.com that in areas such as Greater Los Angeles, where traffic is a daily consideration, the pandemic’s upending of the traditional 5-day work week has resulted in consumers cocooning even more within the areas surrounding where they live.“By not going into the office five days per week, consumers are saving on traditional ‘break’ expenses like $6 lattes and $15 salads that may have been previously part of their Monday through Friday routine,” Ury said. “They’re using some of this extra cash on retail therapy.”With online shopping and returns continuing to rise and some of the internet’s biggest retailers – like Amazon and Target offering curbside pickup and convenient returns for online purchases, Ury said consumers have more reasons to visit neighborhood centers anchored by tenants like Whole Foods and Target which translate to additional spending; not just at those anchor stores but at surrounding stores as well.“Consumers continue to crave convenience,” Ury said. “Shopping in urban cores in cities where consumers don’t heavily rely on mass transit – such as Los Angeles – was never especially convenient unless the consumer was already there for another purpose, such as their office.“Neighborhood and power centers with surface parking are far more convenient than a parking garage or structure in an urban core.”Doug Healey, Senior Executive Vice President – Leasing, Macerich, tells GlobeSt.com that Macerich’s Regional Town Centers in attractive suburban markets are firing on all cylinders in the current environment.Many of the highest-performing properties across the Macerich portfolio are set in buoyant suburban markets – from our #1 center in terms of sales per square foot, Broadway Plaza in San Francisco’s East Bay community of Walnut Creek, to Washington Square outside Portland and Tysons Corner Center outside Washington, D.C.“Post-pandemic, people are demonstrating entrenched preferences to continue shopping, dining, and finding great entertainment close to home,” he said.“Hip retailers are certainly mindful of this ongoing trend and continue to select our outstanding suburban properties. Great names opening soon at Tysons Corner Center alone include ARC’TERYX and Dr. Martens, on the heels of the new and expanded Apple flagship that just opened in May.”

‍Dining and Shopping All Times of Day

‍Carina Donoso, vice president of retail experience & incubation at WS Development, tells GlobeSt.com that, post-Covid, its spheres are tighter; people are staying closer to home, which has translated to more people dining and shopping during all parts of the day. This is ramping categories like fast casual, coffee, services, and uses that provide communal spaces for professional and casual meet-ups.”Shlomo Chopp, managing partner of Terra Strategies, tells GlobeSt.com that before investors start making multi-year investment decisions based on trends, they should consider that the resurgence of the suburban shopping center may not in itself be a secular trend, but rather a reflection of where people live.“The consistent theme always will be localization and meeting the consumer wherever they may be,” Chopp said.“The future of shopping centers combines e-commerce fulfillment and stores so that the savings of distance is combined with providing the consumer with what they want when they want and how they want it.”Wickham Zimmerman, CEO of OTL, tells GlobeSt.com, “One big reason that suburban shopping is hip again is that design-and-build firms like Outside the Lines (OTL) are making it possible for retail centers to bring genuine Vegas-scale attractions to shoppers, providing experiences they won’t see elsewhere.”On June 23, OTL launched one of its largest projects to date – the spectacular Illuvia fountain at the EpicCentral development in Grand Prairie, Texas. Illuvia features water jets up to 60 feet high and coordinated light shows that include eye-popping projection effects.

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El Segundo, CA-based commercial real estate brokerage firm Beta Agency has completed the sale of a former Rite Aid in Garden Grove, CA. MK Capital Partners GG, LLC purchased the building from an LA-based private family trust for $5.33 million. The property consists of the former 27,650-square-foot Rite Aid store and a sublease to a local medical office in a portion of the asset.“

The buyer acquired the former Rite Aid box because of its excellent real estate fundamentals, strong probability to re-tenant with a credit tenant in the future and provided for three years of cash flow while the buyer implements his re-positioning to backfill the building,” said Beta Agency’s Adam Friedlander who represented both parties in the transaction, along with the firm’s Richard Rizika. Located at 12491 Valley View Street, the property is situated north of the Interstate 405 and Freeway 22 interchange, and just 5 miles east of Cal State University Long Beach.

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At Beta, we provide strategic solutions that enhance the commercial real estate transaction process. Beta’s unique market insights create a competitive advantage for our clients. The following are a few market trends you may find insiteful.

• Merchants footprints will continue to change as demand of the consumer evolves.

As consumer demand shifts, many up-and-coming merchants will implement small store development strategies in brand relevant neighborhoods instead of conventional flagships. Other retail business models, such as online grocery delivery, buy online and pick up in store “BOPIS”, and apparel resale, will continue to cause merchants to adjust store size. An increasing number of stores will need need to reset or relocate showrooms for increased digital sales as well as utilize larger back of house area for fulfillment areas.

‍Article: In store technology trends

• Increased relationship with community

A shopping environment can serve as a community hub that provides efficiency, connectivity and convenience, and a sense of pride for the community. By increasing relevance to a community, shopping center owners and retailers create greater points of differentiation. Property owners and merchants alike have a connection and a responibility to the community they serve. Each should embrace its role as a stakeholder in the community by providing a relevant sense of place for the community; a place to meet and share experiences and not just a place to buy merchandise. Businesses operating within shopping centers provide amenities to those living and working within a community. They also deliver tax revenues that support schools, health services, and police and fire departments which continues to become more important to the communities served.

• The role of digital shoppingwill continue to have a more significant role in store.

Innovations in digital technology will create a more immersive and more convenient shopping experience. Buy online and pick up in store (BOPIS) will also gain in popularity. Expect to see more frictionless check outs and mobile apps, providing e-merchant product information that enable greater consumer interactivity. AI smart mirrors will also introduce shoppers to consumer relevant products, based on what they’re wearing.  Each of these digital experiences should provide for a more enjoyable and interesting in-store shopping experience.

‍Article: Retail dive in store technology trendsArticle: 14 Examples of Digital Technology in Retail Stores

• While Rent will increase for well-located retail assets, Base Rents may not rise proportionately.

Community serving retail centers maintain historically low vacancies and have experienced growth in Net Operating Income. However, operating expenses which often represent between 20% - 50% of gross occupancy costs will grow disproportionally to overall occupancy expenses. The cost of operating CRE is increasing faster than YOY retail sales, especially in CBDs.

• Consumer Shopping Patterns

The trend of employees returning to office continues to increase, however the average length of daily stay and the number of days per week spent in office remain below pre-2020 levels.As the tug of war between return-to-office and remote workplace continues, consumers will modify shopping patterns and this will create operational challenges for merchants to properly stock and staff stores.

‍Chart: Office Visit Trends 2019-2022 (via Placer.ai)

• Commercial Property Loans

Commercial property loans have become much more difficult to obtain as the Fed maintains higher interest rates to curb inflation.  The cost of debt nearly doubled in 2022 and lender underwriting criteria tightened significantly.  As a result, property values have decreased even while net operating income did not decline.  While no one knows for certain what will happen with inflation in 2023, we project interest rates to flatten and spreads to tighten as the capital markets gain greater overall economic clarity.   As a result, s/c sale and refinance velocity will increase.

‍Chart: 30 year Fixed Mortgage Rate vs. 10-year Treasury Yield (via Wolfstreet.com)

• Closing Statement

Every shopping center is unique and has its own story. Each of these predictions may not apply to every property; they are intended to provide insight to the ever-changing commercial real estate market.Beta collaborates with our clients to create strategic solutions that enhance the real estate transaction process. Our team implements advisory services, analytics, and creative marketing solutions to create a competitive advantage in the marketplace for our clients.

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We are always purposely progressive in Beta!