Big Box Activity Rebounds in Second Quarter

Big box retail activity rebounded in the second quarter after a slow start to the year. According to a report from CBRE, the Los Angeles market had more than 200,000 square feet of net big box retail absorption in the second quarter.

“Demand for class-A big box retail leasing has been driven predominately by specialty grocers and furniture brands in Southern California, with class-B space being a target of fitness users and discount brands,” Rob Crumly, a senior associate at CBRE, tells GlobeSt.com. “The hardest retail spaces to lease—either by location or the condition a space is in—undergo adaptive reuse by landlords, converting them into creative office or multifamily or a mixture of both. Margins in those categories are much higher than retail and can justify additional landlord investment.

While this was an increase over the negative absorption in the first quarter, it wasn’t enough activity to move the retail niche into a net positive for the year. “The challenge predominantly is due to the fact that there are very few big tenants active with space needs above 50,000 square feet,” Scott Riddles, SVP at CBRE, tells GlobeSt.com. “That is true across the entire sector, with many retailers reducing their traditional footprints. Much of the vacant box space that is harder to lease is larger than 50,000 square feet, including several older-format department stores.

Examples include former Sears stores, which are typically over 150,000 square feet. So, unless landlords and tenants are willing to put up a considerable amount of money into accommodating smaller tenants or demolishing these spaces for other uses, landlords will have a very hard time finding occupants to lease them ‘as-is.’  With all that said, there is still good demand for “A” locations in Southern California.”

Despite the challenges in the market, there is still new big box development under construction in Los Angeles, however, it is primarily in the 50,000 square feet and under space.  “Those that are currently under construction are often being built in conjunction with residential and office at the same development,” says Crumly. “The big box retail spaces in these projects are typically going to specialty grocers and fitness users that want to be close to these demographics and are having a hard time finding available suitable space in the markets they want to be in.”

Expect similar leasing activity through the rest of the year, but there will likely be less new supply that comes to market. “We expect the pace of big box leasing to remain the same, but with fewer numbers of spaces becoming vacant, effectively tightening the market over time,” says Riddles. “This combined with limited retail construction and increased retail demolition and declassification, will only tighten the retail market.  Also, in dense and expensive markets like Los Angeles, a large portion of new development is going vertical, which requires less retail in general.”