Retail Flight to Quality Continues

LONG BEACH, CA-National retail tenants are focusing on centers with the best positioning and visibility and the highest traffic counts, said panelists at the Association of Corporate Real Estate Executives of Southern California's 2014 Industry Forecast here last week. However, portfolio diversity helps businesses remain steady over time, they added.

Panelists agreed that 2013 was an outstanding year for their teams. Greg Fisher, president of Present Value Properties, said, “We have more than tripled our business since 2007,” and Shauna Mattis, SVP of Wilson Commercial Real Estate, added, “We also had a very successful year. Now our concern is that much of the quality space got leased and retailers seem to be back in the cautionary role.”

Representing smaller shopping centers in less desirable locations that don't demand 'top rents' has allowed Centers Business Management to continue writing new leases, said Rick Rivera, the firm's president. “Thus, we've consistently increased our volume year-over-year.”

When asked to identify surprises in today's market, Matt Hammond, director of retail brokerage for Coreland Cos., said that while “tenants' sales are getting stronger and there's an appetite to grow due to low cap rates, there is still a disconnect between what an owner needs in rent to make a deal pencil and what the market will bear.”

In a sector that has historically been heavily reliant on the success of grocery-store anchor tenants, panelists said going outside the traditional American grocer has been helpful. “Hispanic retailers are doing a fabulous job of servicing their customer, and stores such as Vallarta and El Super have been very successful at it,” said Fisher. “However, I expect there to be a shakeout in the grocery business because there is a shrinking pie that is being sliced into too many pieces.”

Hammond added that “where it used to be that the traditional grocery stores attracted tenants to a center, we are now seeing that specialty grocers are the stronger draw. Specialty grocers know their target customer so well, which in turn benefits shop tenants considering leasing space.”

Throughout the discussion, panelists identified that the retail landscape has changed to become destination focused and service oriented. Per statistics shared by Hammond, more than two-thirds of leases signed in 2013 were with restaurants/QSRs or service tenants—things you can't do online.

“What I have enjoyed most are the new entertainment concepts that we have been able to bring to our properties,” said Mattis. “We recently added a roller-skating rink to one of our centers in Murrieta. They opened last month, and there have been lines out the door ever since. Entertainment continues to be a great way to drive traffic.”

With the concern of e-commerce taking over bricks-and-mortar business, Rivera commented, “Certainly, the Internet has changed retail. But if you have a property with good visibility and strong demographics, there is always going to be a new tenant with a new retail concept to fill space.”

Looking ahead, Fisher said continuing to be innovative and creative is crucial in retail real estate, while Hammond said that finding supply is his firm's biggest challenge. “We must help our clients reposition existing centers in order to be competitive in this marketplace.”

Yet, the industry has evolved, and everyone is interested in getting deals done, said Mattis. Creating partnerships with other firms has been valuable for her firm, she added.

“The retail market is constantly changing, and in many ways it has become more of a service business,” concluded moderator Brad Umansky, president of Progressive Real Estate Partners. “But change is the thing I love most about our business. It is always evolving, and there is always opportunity.”