Florida and Southern California might anchor opposite coastlines, but their retail real estate development is equally sunny. And while they are being shaped by vastly different economic drivers, their respective retail fundamentals remain strong, driven by limited supply, evolving tenant demand and disciplined expansion strategies.
"Florida has been historically underserved in retail square footage per capita," says John Fahey, SRS Real Estate Partners' SVP and managing principal. "And with the state's surging population growth fueling new retail demand, we are currently in a development 'catch-up' phase."
However, while Southern California's high-income consumer base continues to drive strong retail performance, developers are navigating different barriers, says SRS' Terrison Quinn, the region's EVP and managing principal.
"High construction, debt and land costs make new retail development challenging in Southern California," says Quinn. "It's often coupled with other economic uses, including residential and industrial, and the need to fulfill entitlements for more profitable projects."
Niche Categories Thrive, Rent and Vacancy Rates Respond
The current economy has created a bifurcated consumer, and it's reshaping the retail market. Quinn and Fahey note that this bifurcation is reinforcing demand at both the high-end and discount segments, leading to middle-market pain points. However, bright spots are emerging, including the fitness and wellness segment which is experiencing a resurgence in both regions. In Southern California, leasing and development for discount and ethnic grocery outlets are also increasingly active, as are fast food, coffee and value and discount chains.
"Urban mixed-use retail has been challenging, and B and C malls have faced tougher times," says Quinn. He notes that tenants are adjusting rent thresholds due to higher development costs, causing developers to allocate more capital for tenant improvement allowances and landlord work costs.
"Longer-term commitments are becoming more common due to these higher costs, but despite these challenges, overall rents are high and vacancy rates remain at a nearly all-time low," adds Quinn.
Once known as a retirement haven, Florida is now attracting younger professionals, according to Fahey. He says that the population flex is helping grocery-anchored properties thrive, and warehouse retailers are "booming." Additionally, he sees significant retail activity in urban environments, including Miami and Tampa. "Rents in Florida are still significantly less than in California, but they are trending upwards," says Fahey.
Institutional Investment Ramping Up
Driving much of the retail activity is a return of institutional capital, which had been a more cautious partner during tumultuous economic times and whipsaw inflation. Investors are re-entering the retail sector and targeting segments such as grocery-anchored assets – signaling renewed confidence in long-term performance.
"There's more institutional money pouring into the region," says Quinn. "Investor demand for retail is high, with buyers aggressively looking for opportunities in a competitive market."
"The demand for retail investment in Florida is higher than ever, with significant interest from institutional funds," says Fahey, adding that REITs are increasingly looking for opportunities and driving up prices, while compressing capitalization rates.
"Institutional capital is shifting towards retail because of its growth potential," he says, adding that investors are allocating more of their portfolios to retail, recognizing its higher yields and resilience.
"Retail capital investment is returning with conviction," says Quinn.
Visit SRS Real Estate Partners at ICSC Las Vegas, South Hall Upper booth 4107Q.
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