By Joe Gose, Contributor
Shopping Centers Today
Vacancy rates in open-air centers have remained low, thanks to restrained development. Developers added nearly 14 million square feet of open-air center space in the U.S. through the third quarter of 2017, and projected completions for the full year represent less than 0.5 percent of open-air inventory, for the eighth year straight, according to Marcus & Millichap. That compares with an annual growth rate of about 1.9 percent in 2008 and 2009, when open-air center developers brought a total of some 180 million square feet to the market.
But the slow growth of open-air center space has also yielded benefits, says Alan Pontius, national director of Marcus & Millichap’s specialty divisions. Since 2011 the average vacancy rate in the segment dropped by nearly 300 basis points, to 8 percent at the end of the third quarter of 2017, he says. Meanwhile, after bottoming out at about $13.48 per square foot in 2013 — off by $2.30 per square foot from the previous peak — the average rental rate at open-air centers edged up to $14.12 per square foot.
“New retail construction has been muted for years, but the condition has strengthened open-air centers as the vacancy rate has moved down and the rental rate has shown modest growth,” Pontius said. “In some ways, retail is the most fascinating and dynamic place in the real estate business today, because there’s so much debate, argument and speculation about what development is going to look like tomorrow.”
Roughly 14 million square feet of open-air shopping center space was under construction in primary and secondary markets in December, according to data from JLL and CoStar. Neighborhood and community centers that were more likely to include a grocery store accounted for roughly half of that total, while the lifestyle and power center categories made up about 3.5 million square feet and 2.6 million square feet, respectively.
“There are just very few pure retail developments going on right now outside of mixed-use development,” said James Cook, director of retail research at JLL. “Unfortunately, we’re still dealing with an overhang from overbuilding that occurred in the last cycle. Until that gets absorbed or dealt with, there’s not going to be huge demand for new retail development.”
Banks pulled back on making construction loans to developers of all properties over the past several years, in response to regulatory changes, and they are particularly scrutinizing retail development. During the last cycle, loans were handed out for greenfield projects based upon rooftop and population projections, Cook says. Today lenders require a strong existing population and leases with tenants that can generate cash flow in stressful times.
At year-end, the Dallas metro ranked as the most active market in the U.S., with about 1 million square feet of open-air shopping center space under construction, according to JLL and CoStar. Berkshire Hathaway’s March ground-breaking on an entertainment-themed lifestyle center at its $1.5 billion Grandscape mixed-use community in The Colony accounted for a significant chunk of that development. The firm opened a 560,000-square-foot Nebraska Furniture Mart store at Grandscape in 2015, and though any final footprint remains in flux, the lifestyle center component could ultimately comprise 1.5 million square feet of shops, restaurants, hospitality uses, entertainment venues, office space and residential units. Committed tenants include a 300,000-square-foot Scheels and a 16-screen Galaxy cinema.
The Houston area ranked second after Dallas, with some 786,000 square feet of open-air development under way. Houston-based NewQuest Properties is developing, among other projects, a 130,000-square-foot lifestyle center at its Stableside at Falcon Landing project, in Katy. The development encompasses an adjacent community center anchored by a 102,500-square-foot Kroger that opened last June. The lifestyle component will feature a 90,000-square-foot, family-oriented athletic club as well as restaurants and service tenants situated around a green space of roughly 10,000 square feet, according to Brad Elmore, a vice president in NewQuest’s brokerage division. “We have strong family demographics in Katy, and our strategy here is to offer a community amenity with a real ease of access,” Elmore said.
Following the Texas markets, the Boston and Philadelphia areas were each seeing some 600,000 square feet of open-air shopping centers under construction at year-end, while the Chicago; Tampa, Fla.; and Washington, D.C., metros each reported about 400,000 square feet of construction. California developers were building nearly 500,000 square feet in the Los Angeles and Orange County markets combined.
In the fourth quarter, El Segundo, Calif.–based CenterCal Properties began razing an old hotel near Alamitos Bay to make way for a 220,000-square-foot lifestyle center on Pacific Coast Highway called 2ND & PCH. A 45,000-square-foot Whole Foods is anchoring this project, which is scheduled to open in the summer of 2019. The balance of the space will feature a mix of local and regional restaurants and some boutique fitness operators, says Steve Shaul, CenterCal’s senior director of development. In addition to bringing new tenants to the market, 2ND & PCH is reinvigorating a long-underused but sensitive site: Six years ago Long Beach had rejected a different developer’s ambitious mixed-use proposal, amid concerns about traffic and wetland and wildlife impact.
“Given the history, we felt it was best to do something under the current zoning, which is why we were able to get our entitlement in a pretty timely manner,” said Shaul. “Being entrenched in the community outreach, what I’ve noticed about Long Beach is that, while it’s a large geographic city with diverse demographics, it’s very local-driven. That’s unique and something we want to pay attention to.”
On the East Coast, meanwhile, Kimco Realty Corp. broke ground in August on the first phase of a lifestyle center at the Dania Pointe mixed-use project, in Florida’s Broward County. The $109 million, 300,000-square-foot project will feature BrandsMart, Hobby Lobby, T.J.Maxx, Ultra Beauty and several restaurants. Kimco plans to develop an additional 700,000 square feet of retail space at Dania Pointe, which also calls for offices, apartments and condominiums.
To the north, in Daytona Beach, racetrack owner International Speedway Corp. hired Kansas City, Mo.–based Legacy Development to build and manage One Daytona, a mixed-use project featuring 300,000 square feet of nearly completed retail, entertainment and restaurant space, adjacent to the Daytona International Speedway. Cobb Liberty Luxury Theatres and Bass Pro Shops were the first tenants to open in this $140 million project, in late 2016 and early 2017. At press time the majority of other tenants had either opened in the last quarter of 2017 or were scheduled to at some point early this year, according to Jeff Boerger, International Speedway Corp.’s vice president of corporate development. One Daytona will also contain hotel and residential components, and International Speedway Corp has pegged Legacy Development to redevelop and reposition the nearby, 75,000-square-foot Volusia Point Shopping Center, which will be rebranded as the Shoppes at One Daytona.
International Speedway Corp. completed a $400 million renovation of the speedway in 2016, and the company had envisioned giving race fans a more robust guest experience beyond the track, Boerger says. “Plus, we wanted to provide a live-work-play destination for the residents in Daytona Beach, Volusia County and the region,” he said. “Where it makes sense, we envision more of this type of development within our portfolio of 12 racetracks across the country.”