GLOBEST.COM: Thinking Ahead is Key to Maximizing Value

By Carrie Rosenfeld | Orange County

As published on GlobeSt.com, May 5, 2015

CC_Matt-Hammond TUSTIN, CA—Since the economy has improved, retail landlords now have the ability to be much more strategic about the types of tenants to which they are leasing, Coreland Cos.’ director of retail brokerage Matt Hammond tells GlobeSt.com exclusively. We spoke with Hammond before ICSC RECon about how the retailreal estate market has changed over the last few years and how proactive landlords are maximizing on the return of their leasing efforts.

GlobeSt.com: What differences do you notice in the retail sector going into spring as compared to previous years?

Hammond: The greatest difference is that today we are actively marketing occupied units, instead of vacant units. The low-hanging fruit is gone. Quality units in today’s market have been absorbed, but the flight to quality remains. Meaning, while tenants have aggressive growth plans, they are not willing to settle on a second-tier location or pay inflated rents. Rather than focusing on what is available now, many tenants and landlords are talking to each other about what will come available in 12-plus months.

Three to four years ago, our focus at ICSC was to market multiple vacancies. Now, as grocery store anchored centers average over 95% occupancy across the region, the goal is to look at “right-sizing” our box tenants, improving the shop tenant mix, and bringing in quality tenants that can generate higher sales which in turn allow them to pay more rents.

GlobeSt.com: Do you find yourself being much more proactive, rather than reactive, when addressing shopping center vacancies?

Hammond: Absolutely. The key today is to ensure that landlords are strategically looking at properties with a very proactive mindset. Even if you are not dealing with a box vacancy at your center, you need to be looking at your office supply and electronics retailers, as well as some of your weaker grocery store sites, and asking, “Is Vons or Ralphs going to remain here for the long term? If not, who do you backfill them with?” And you can’t overlook smaller tenants either. A lot of regional restaurants signed leases five years ago that are expiring. Given the competitive restaurant sector, there is an opportunity to replace them with trendier restaurants with stronger followings. These restaurants can generate higher sales and better rents, as well as infuse new energy into a shopping center.

GlobeSt.com: Let’s talk more about the office-supply and electronics vacancies. How are landlords planning for that?

Hammond: There’s a lot of right-sizing going on in the market. Best Buy, Office Depot and Staples are great examples of retailers who currently occupy 24,000 square feet, but now know they should really be in 10,000- to 12,000-square-foot spaces. We are not going to allow our landlords to get caught by surprise when these leases come up for renewal. Instead, we are looking ahead and proactively marketing the space.

If Staples’ lease is set to expire in 2016, then we already know we will need a strong 12,000-square-foot tenant to put in place, or a replacement tenant that will fill the whole space. If we can identify a strong co-tenant in advance, it allows the landlord to proactively address the situation with Staples, solving the problem for both landlord and tenant a year-and-a-half ahead of the lease expiring.

As far as the other boxes—the Sears and the Kmarts of the world have been generating a lot of interest and activity lately. An expiring lease with Kmart, or a Sears site that the company is willing to turn over, is a valuable asset with tremendous potential. We are currently working on a Kmart site in Camarillo, CA, which will come available in 2016. We’re evaluating options based on the demands of the immediate trade area, working to determine if it is best to pursue two 50,000-square-foot tenants, or three 33,000-square-foot tenants. Either way, the key remains in marketing the site proactively and minimize the downtime.

GlobeSt.com: What about the grocery-store consolidations?

Hammond: The jury is still out on how the market is going to respond to Haagen Food and Aldi entering Southern California, as well as the ongoing fallout from the recent Fresh & Easy and The Fresh Market closures. The major players have closed nearly 40 stores over the last 10 years and it remains an extremely competitive market. How these new players will differentiate themselves remains to be seen.

Fresh & Easy’s recent announcement of store closings across the region present great opportunities for landlords willing to start pursuing potential tenants. Even though landlords are still receiving rent for these sites, those owners that are actively looking at how to re-tenant the space and possibly negotiate a buyout or replacement, are ahead of the curve.