How the Grocery Landscape Has Changed

SAN DIEGO—Along with consolidations and specialty grocery stores, consumer expectations have changed dramatically in the last decade, Cushman & Wakefield's John Jennings and Aaron Hill tell GlobeSt.com exclusively. We spoke with Hill, director of retail services, and Jennings, senior director of retail services, about some of the retail leasing trends they are noticing in the San Diego market.

GlobeSt.com: What trends are you noticing among leasing transactions in San Diego with regard to size and location?

Jennings: We're excited that mom-and-pop-shop leasing is coming back. Last year, we saw core centers come back to occupancy, and we're seeing rent growth in core centers for the first time. The mom-and-pop recovery is allowing us to move the needle in B centers that have been sitting in the 7% to 8% vacancy zone. We expect those centers will move up to 4% or 5% vacancy by the end of the year.

As for location, we have core A+ centers in every trade area. Tenants who are expanding are only willing to consider the best location in a marketplace.

GlobeSt.com: What types of tenants are becoming more prevalent in the market?

Hill: The bulk of activity in the market is consistent with the last couple of years. There are a tone of restaurants—neat concepts that are expanding into San Diego—and there has been a lot of activity in the restaurant category in the last couple of years. There was the burger craze, and how the pizza craze and healthy concept Farm to Fork and Urban Plates; Lemonade, which is from L.A.; and Native Foods Café. There are also a lot of fitness tenants as well—both boutique fitness and larger players—that have absorbed a lot of space in shopping centers. Tenants like Orangetheory and CorePower Yoga have expanded aggressively in San Diego over the last couple of years.

GlobeSt.com: How are retailers and retail property owners here dealing with e-commerce?

Jennings: It's hard to put a needle on that. Brick-and-mortar retailers and Internet retailers are demonstrating that they can work together now. The Internet is not going to eliminate retail stores; rather, retailers are using the Internet to advertise their product and allow another avenue for retail sales. It's a supporting element to their business.

A lot of people think that the Internet accounts for 30% to 40% of total retail sales, but that is inaccurate. It's actually in the 6% range, but people can't believe it because they think it's so much more. Retailers today have a much more positive point of view about the Internet; they see that it allows them to increase their sales element. This may not work for electronics and books—even Staples—when you have a product that can be bought at Costco and also on the Internet via Amazon. Certain categories will be eliminated, but from a macro perspective, the Internet will be helpful for retailers to reinvent themselves and meet the demands of the consumer, which are harder to meet every year.

GlobeSt.com: How will consolidation within the grocery sector impact retail here, especially since grocery-anchored centers are so popular now?

Jennings: With Haggen buying the Albertsons portfolio and Terramar taking over Vons, we don't know what's going to happen with all these stores. Haggen says they have a list of stores they'll be opening, but we're really sitting in no-man's land. We don't know if they're going to be subleasing some of these or selling them off, which has handcuffed the first-tier grocery category. Vons, Ralphs, Albertsons and Stater Bros. are not doing any new deals right now.

The same thing is going on now with the Office Depot and Staples merger, and Office Depot also recently absorbed Office Max. It's going down to one office tenant, and there will be a lot of real estate that's going to be cannibalizing each other. There will be excess real estate for sublease and for sale. How does that affect the market?

Also, retailers in general are looking at profitability and wondering if they need to be in that square footage. They're downsizing, and most tenants have a business plan of being smarter, more profitable and more nimble.

GlobeSt.com: How will the influx of specialty grocers coming into the market affect this sector?

Jennings: While grocers have been on the sidelines, they have had a whole influx of specialty markets coming in. ALDI, Walmart Neighborhood Market and Barons Market have used the shakeup to their advantage and have been able to secure real estate while others are trying to figure out what they're doing. The outcome of the grocery wars is still uncertain.

GlobeSt.com: Will consumers embrace of these different retailers once things settle down?

Jennings: From the consumer standpoint, shoppers are not trying to buy all of their products in one place. They're going to Costco to get paper goods and bottled water, they're going to the standard grocery store out of convenience when they need something nearby, and then they go to a specialty store like Trader Joe's because they have items there that no one else has. A fourth type—stores like Sprouts and Barons that sell quality produce—has crept into families' routines recently.

Hill: Shoppers don't mind going to four different stores to get what they need. The variety is changing the shopping experience and creating new neighborhood experiences that are focused on outdoor patio areas, gathering areas, the coffee shop next to the brewery, going to a spinning or yoga/Pilates class, and getting away from what can be duplicated on the Internet like buying diapers or water.

Jennings: A large percentage of retail centers are looking to reposition as lifestyle centers. There are restaurants that have a huge following in other markets that haven't yet hit San Diego. This is what San Diego has been missing—an urban live/work/play environment. San Diego is often referred to as the smallest big city. It's rapidly changing, and we will continue to improve the quality of our lives. With the economy getting stronger, landlords will be able to achieve the rents necessary from tenants to invest this money in their properties.

Median household incomes have increased significantly in San Diego, and the unemployment rate is decreasing. We're starting to see the economy allowing equilibrium between the landlord and the tenant. Because class-A centers are full, tenancy is spilling over to class-B centers, and retailers are becoming more confident. The tenant pool is smaller than prior to the recession—there's not the same amount as we used to have—so we have to be smart and strategic with how we re-tenant spaces; the downtime of re-tenanting space is longer now.

GlobeSt.com: What other emerging retail trends are you noticing?

Jennings: There is a new kind of crossover between online and brick-and-mortar in that you can walk into a store like Bonobos in UTC, get fitted for a suit and order it online, and they'll send it to you. This is an example of a new type of retailing—going to a brick-and-mortar store and not walking out with a product. Who would've thought that retail could evolve this way?