by Mez Birdie, CPM, CCIM, SCSM; Director of Retail Services – NAI Global; [email protected]
Leasing Trends: While leasing trends vary from city to city and state to state, retailers have become more demanding in their requirements for stronger co-tenancy language, early termination rights, and more restrictive exclusives to protect their core business. Retailers are also asking for more tenant improvement allowance from landlords instead of using their own capital. There has been a reduction in second generation, large box space. As a result of bankruptcies over the past few years, there was also significant amount of medium size retail boxes that needed to be leased. Most of these boxes are now occupied and vacancies have declined. There also is a tremendous amount of activity in the quick-casual serve business primarily with franchised restaurants. During the recession, many entrepreneurs and business executives decided to go into business for themselves and/or purchase franchises. This has brought a tremendous upsurge in new franchise concepts and the need for new retail locations.
Hot “Use” Categories
Health Clubs: A very active retail category is the health fitness club. There is strong activity in fitness clubs offering spa-type amenities along with typical fitness club services. Some clubs give their customer a country club-type atmosphere with restaurants, spas, personal services, etc. There is also strong activity in budget-oriented health clubs offering 15,000+ sq. ft. “no frills” environment, with a clean and well equipped fitness center. Thus fitness clubs are catering to health conscience customers across the spectrum and unlike the past, generally without a contract.
Medical and Dental Walk-in Clinics:
Another hot category is walk-in medical and dental clinics. These clinics for minor illnesses and non-life-threatening injuries are growing along with rising demand in medical field. Clinics offer a no-appointment alternative to the emergency room or doctor’s office. Health care providers are looking from a retail approach and the combination of medical/retail use these days is prominent. Demand for urgent-care centers is increasing in most markets. Experts in the urgent-care industry believe that the Affordable Care Act should lead to increased demand for clinics.
Landlords are replacing multiple tenants in centers to open larger clinics which pay higher rent, are credit tenants and increase customer traffic due to a larger trade area for the center. With the era of retail medicine fast approaching, health care providers and medical specialists are increasingly opening facilities in shopping centers, which offer an attractive combination of affordable space, good patient access and ample parking.
Construction of Medical Office Buildings (MOBs) can cost more than $200 a square foot to develop. Renovating existing space at a retail center is substantially less, so there’s a big incentive to take retail space rather than build to suit. Vacancies from big-box retailers and struggling strip centers are turning out to be reasonably priced options for many health care facilities, which are increasingly moving away from the centralized service delivery model centered on traditional hospital campus and trending toward mixed-use properties where medical office buildings, retail stores and restaurants co-exist.
Shopping centers are increasingly being repurposed for medical uses as service providers look to move closer to patients and reduce costs by providing outpatient services. High retail vacancy, particularly in the suburbs, due to overbuilding prior to the recession and housing crisis, and increasing online retail sales have created opportunities for health care tenants. Well-located big box centers in the 20,000–50,000 sq. ft. range with ample parking, such as those occupied by bankrupt retailers, have been a popular draw for many medical tenants.
Retail clinics will remain an important delivery mechanism as health care providers seek to cut costs and handle the surge in newly insured patients with the implementation of the Affordable Care Act. While retailers and health care tenants share many common needs, there are also significant differences between these uses. Shopping center leases typically prohibit the use of office or other non-retail uses. Medical spaces can include cafes or gift shops that may run against another tenant’s exclusive use provisions. Also, national drug chains, discount stores and supermarkets are increasingly offering their own in-store retail clinics, but with limited medical services.
Downsizing: The trend of downsizing is continuing as retailers seek to reduce occupancy costs. Many retailers have been affected by the continued increase in e-commerce sales. Office supply stores had been operating in 20,000–25,000 sq. ft. and are now downsizing to 10,000–13,000 sq. ft. and consumer electronics stores operating in 40,000–55,000 sq. ft. are now reduced to 25,000–30,000 sq. ft.
Healthy is Trendy: Health and wellness is quickly emerging as the focus in the food industry. The average American now places more emphasis on healthy food decisions than ever before and wants more healthy eating places than they were a few years ago. As consumer preferences have evolved, restaurant and food service operators are facing challenges and opportunities that come from the convergence of health and wellness priorities. The total food experience includes: sustainability, atmosphere, authenticity, flavor and taste. Portion sizes are getting smaller meaning more affordable plates and healthier options. Health-conscious and thrifty diners have been driving operators to re-evaluate how they portion and price food. Consumers are reconsidering their menu choices based on overall caloric intake and the impact it has on weight. Trend of half portions is becoming more common across restaurant menus.
Wireless to Wi-Fi: Retailers and restaurateurs are bringing plug-and-play Wi-Fi to their stores. Most shoppers and customers carry smartphones or tablets, and this upgrade makes their time in store easier and more enjoyable. This upgrade also provides the customer a mobile application that will be used for coupons and special offers.
Letter of Intent: A Discussion Group session at NRTA’s annual convention in Reno this September will be focusing on the Letter of Intent (LOI). Upon finalizing business terms with the retailer, some landlord LOIs have become more like a lease document and takes weeks or months to consummate. When eventually the LOI is finalized, it typically goes to a real estate committee, which could make further changes prior to a lease being drafted. Additionally, many legal departments of retailers or their attorneys are inundated with work. The legal department ends up reviewing documents on a priority basis, so if you are not making a deal with a tenant that will open soon, legal documents will be further delayed.
Tenant or Landlord market? During the recession, it was definitely a tenant’s market due to the lack of expansion by many retailers. However, there has been a shift in certain markets and there is now a shortage of quality retail centers due to lack of new projects being developed in the last few years. Many in the industry believe that after many years of Tenant’s calling the shots, the shift is now towards a Landlord’s marketplace.