Most metrics characterize the retail real estate market as strong and resilient, but the reality is more nuanced.
Although retail strip centers are leading market growth, a property’s performance can be significantly impacted by its anchor tenant. Retailers that provide a valuable in-store experience to distinguish themselves from online retailers are thriving, and properties anchored by these stores are often outperforming expectations. However, retailers that don’t provide unique products or value may struggle to differentiate themselves, and performance is more tenuous.
The financial stability of an anchor tenant can also impact the entire property. Though some level of tenant credit risk is inevitable, backfilling a space creates additional challenges. For instance, to re-tenant vacancies caused by the bankruptcies of Big Lots, Value City Furniture, and The Sports Authority, Next Realty needed to invest capital for tenant improvements and space reconfigurations, endure rental downtime, and offer leasing commissions. Additionally, tenants are increasingly chasing lower rents, and retailer relocations are harder to absorb than smaller spaces.
CBRE expects full- and quick-service restaurants to remain active tenants, especially in high-traffic suburban and mixed-use areas, and rental growth should continue for open-air retail properties because of limited new supply. However, as sales growth slows for retailers, tenants are becoming more cautious. They are increasingly focused on deal structure, additional concessions, and tenant-improvement allowances.
“Retail real estate property valuations remain high, with heavy buyer competition, which makes closing acquisitions more challenging and time-consuming than usual,” says Andy Hochberg. “By staying focused on our strategy and relying on our deep expertise in the market, we can ensure that we’re making smart decisions.”
