Retail Leasing Raises Shadow Market Questions

DANA POINT, CA-What appears to be an uptick in retail leasing in Southern California may bode well for the market, but it also poses questions for landlords in how aggressive they should be in seeking new lease terms. Founder Terry Bortnick of locally based Argent Retail Advisors tells GlobeSt.com that the company has negotiated more than 110,000 square feet of retail leases in Southern California in recent months in a significant uptick from the same time last year. However, Bortnick adds, the apparent improvement in market conditions—which also includes strong activity by local and regional retail chains—also presents some strategic questions for landlords as they figure out how to proceed in future lease negotiations.

"There is still a large shadow inventory looming," Bortnick says. He explains that "shadow inventory" is space that is now occupied by retailers who have enjoyed lower rents and other concessions from landlords who have been intent on keeping their shopping centers occupied.

If the market is in fact improving—and signs point to that because some of the vacant retail space is beginning to fill—landlords who provided rent relief and concessions to tenants to keep their centers full may want to go back to some of those tenants and renegotiate. Therein lies a dilemma for landlords, Bortnick says. "To go back to those tenants now and try to start moving rents up presents a real slippery slope because landlords may end up putting more space back on the market by doing that," if the tenants balk at the proposed rent increases and decide to vacate their spaces he says.

On the other hand, not to go back and ask for higher rents could also be a mistake, Bortnick says. "If landlords push too hard, they might wind up with vacancies again. But if they don't push, they could be left with rents that could be higher, or maybe stronger tenants with stronger financing."

And prudent asset management dictates that building owners should try to negotiate higher rents when the market improves. Especially, he says, when many tenants have benefited from concessions. "If tenants are starting to report higher sales and if consumers are starting to buy again, and open up their wallets, then it is only fair that the tenants who got relief during the bad times should be ready to give something back," he says.

How the shadow inventory question plays out ultimately will depend on sales, Bortnick says, but meanwhile, he notes one of the most interesting developments in the market this year is that "seasoned local chains, attracted by good pricing," have been one of the most active sources of new tenancy for retail space.

Such chains, with anywhere from a handful to 50 or 60 locations, have been more active locally than national chains, he says. As an example he cites Mother's Nutritional Centers, which focuses on selling to women's, infants' and children's nutritional programs. He says the lower-priced chain, which operates 65 stores throughout Southern California, is one of the leaders in providing food and sundries to low-income families and is especially suited to doing well in tough times. It is "aggressively expanding to good locations that are well priced," Bortnick says.

Mother's Nutritional Centers is one of the tenants among the 110,000 in leases that Argent has negotiated in recent months. The chain signed for 2,678 square feet at Richance Plaza in Anaheim. Other highlights among the 110,000 square feet of deals included a 17,500-square-foot lease by Froogles Discounts at Colton Courtyard in the Inland Empire city of Colton, a 17,500-square-foot lease by Bravo Bargain at Palm Court in Fontana, a 23,807-square-foot deal by the AJ Wright division of TJ Maxx at Palm Court, a 3,703-square-foot lease by Tarbell Realtors at Plaza Del Lago in Mission Viejo and 6,056 square feet by Brandon's Diner at Vineyard Village in Ontario.

Bortnick points out that the number of deals Argent has negotiated is about the same in the Inland Empire and Orange County, but "the square footage has been a lot higher in the Inland Empire because we happen to have bigger spaces there." Overall, he says, "The market appears to have bottomed and demand and activity are picking up in general. The tenant base seems more optimistic so far this year and has less fear than we saw this time last year." Pricing remains a major issue, however, and Bortnick advises: "Landlords who can be aggressive with their pricing certainly stand a better chance than those who are holding out for top dollar."