TUSTIN, CA—As the retail sector continues to redefine itself post-recession and among the growing presence of e-commerce, various categories within the sector are undergoing radical changes. Among those categories is the neighborhood center, once dominated by big-box retailers and now finding a new face. GlobeSt.com spoke with Matt Hammond, director of retail brokerage for Southern California-based Coreland Cos., who told us exclusively how this category is changing and where its future opportunities lie.
GlobeSt.com: How have neighborhood shopping centers evolved post-recession?
Hammond: Today’s neighborhood center basically starts with everyday needs, things you cannot get on the Internet: a grocery store—and this includes ethnic or specialty grocery stores—drug store, hair salon, dry cleaner, pharmacy, fitness center. If you’re a prospective buyer, you want the center to have a strong grocery store and strong service tenants as opposed to a clothing store or Hallmark store that might not be around in five years—places where customers make weekly trips to buy groceries, get prescriptions filled, get their nails done, and eat.
Speaking of eating, restaurants are becoming more of a community experience in neighborhood centers. Traditional chain restaurants like Chili’s and Applebee’s might be attractive because they havegreat credit; however, many of today’s customers are looking for trendier eateries that offer locally sourced product. While strong financials are still a priority, landlords appreciate these concepts because they offer something unique and different, whether it’s delivering health food or a burger. It used to be that anchor tenants were always your big-box retailers, but now neighborhood centers are being anchored by restaurants, services and gyms.
In fact, that’s another new trend: fitness. Whether it’s in Irvine or Corona del Mar or Tustin, the new neighborhood center caters to the mom who drops the kids off at school, grabs a coffee and runs errands, or goes to the gym then grabs lunch. These customers are looking for a quality yoga or Crossfit studio and healthy restaurant alternatives.
GlobeSt.com: What are some of the most recent trends in regard to the absorption of vacant space?
Hammond: Health and fitness has really been the driver here in regard to the absorption of vacant space, including some of the larger spaces. The gyms and fitness tenants have absorbed much of the vacant drug or grocery stores in class-B or –C shopping centers. While they are typically not an owner’s first choice because they are more expensive to build out, gyms do generate traffic throughout the day and are less threatened by e-commerce.
Also, medical providers are absorbing much of this space. Healthcare services are reaching out into neighborhood centers because they provide a cost-efficient option with strong visibility. It puts these healthcare providers directly in front of their customers and takes the pressure off emergency rooms at local hospitals. We’re talking about a former Blockbuster or Hollywood Video space, or even a former bank being converted into an urgent-care facility, for example. These deals require substantial tenant improvements; however, the tenants also invest a good amount of their own money in the build-out and the leases tend to be for longer terms.
GlobeSt.com: Describe the impact that discount retailers have had on neighborhood shopping centers.
Hammond: While most other retailers were struggling during the recession, the discounters took advantage of opportunities to gobble up space. It used to be that landlords did not want a Marshall’s or Ross in their center—they were a Band-Aid during those years. However, despite the economy, the discounters grew profitably. Customers got comfortable shopping at these stores and continue to appreciate the value today.
GlobeSt.com: What other retail trends are you noticing?
Hammond: Rents are rising moderately; however, tenant-improvement allowances and landlord concessions are still high. We are in active negotiations with tenants like Starbucks and Sleep Number Mattress where they are paying rents equivalent to 2005. However, landlords are providing large TI packages and additional landlord’s work.
I’ve also seen deal making change dramatically in the last five or six years. At the height of the market, landlords had all the leverage, dictating the market, and negotiations were not friendly. Then, during 2008-2011, tenants controlled everything. But over the last two years, a better partnership has developed between the tenants and landlords. We sit across the table, and the landlords are saying, “Based on my land costs, if you can pay xx rent, I can give you xxx amount in tenant improvement allowance” and the tenants are opening up their books and saying, “Here are my sales projections, and I can pay you xx.” Both sides are working together to succeed. It’s much more of a fair negotiation or partnership than we’ve ever seen it.
The people who have made it through the last seven or eight years have all been humbled. They’re honest and they have a good reputation. Handshake deals are back a little bit, but it’s a different type of way to negotiate—we’re working together to strike a deal that works for everyone. It all comes back to relationships built up over the last 10-15 years. People underestimate the value of the human element with the Internet and Google Earth and email blasts. At the end of the day, it’s relationships and picking up the phone that counts: old-school brokering.