EXCLUSIVE Five Retail Leasing Trends You Need to Know

MIAMIRetail leasing is a different animal in Miami than it is in Houston, Seattle or Chicago. But there are some common threads that run through the markets. caught up with Jerry Welkis, president of Welco Realty and X Team International partner, to get his take on how retail leasing has changed and what trends he sees in emerging in part one of this exclusive interview. Welco has represented the likes of AMC Theaters, Marshalls, Toys ‘R Us, Party City, and Dress Barn. Be sure to come back this afternoon for part two, where Welkis will discuss his best retail leasing strategies. What is the state of retail leasing and how has it changed over the past 12 months?

Welkis: Over the last 12 months there has been a significant increase in the open to buy for both national and regionalretail chains. There seems to be a real interest in doing new deals, however retailers have become more demanding in their requirements for stronger co-tenancy language, early termination rights, and more restrictive exclusives to protect their core business. Retailers are also asking for more tenant improvement allowances, which suggests that they are looking for the landlords to help fuel their expansion by using landlords’ dollars as opposed to their capital expense dollars, allowing them to open more stores.

There has also been a severe reduction in the last 12 months of second generation, large box space that has not already been leased. As a result of the bankruptcies we saw over the past few years, including Circuit City, Borders, and Linens N’ Things, there was a significant amount of medium and large size retail boxes that needed to be filled. That is no longer the case.

There also seems to be a tremendous amount of activity in the quick-casual serve business primarily with franchised restaurants. When corporate executives and middle management found themselves out of work during the down turn, many of them decided to go into business for themselves and purchase franchises. This has brought a tremendous upsurge in new franchise concepts and the need for new retail locations. Is it easier or more difficult to get retail leases done? How creative do you have to get these days?

Welkis: It has become increasingly difficult to get retail leases finalized. One of the major issues is finalizing a Letter of Intent.

When you finalize the business terms with a retailer, the letters of intent that have been drafted have become more like lease documents and it takes weeks, and in some cases months, just to finalize it. When you eventually get it finalized, it typically goes to a real estate committee, which meets once a month. If you miss one meeting, it will get put off until another 30 days.

Additionally, many of the leasing companies have scaled-down and the legal departments are inundated with new leases, lease extension agreements, estoppel certificates, etcetera. The legal department ends up reviewing documents on a priority basis so if you are not making a deal with a tenant that will open in the same year, your leases get put in the bottom of the pile. What trends are you seeing in retail leasing? For example, are certain product types hotter than others? Certain sizes trending generally? Tenants looking for particular features? Is it a tenant’s market or a landlord’s market?

Welkis: One of the very active retail segments is the health club fitness center industry. We are still seeing strong activity in the big box fitness clubs from 30,000 to over 100,000 square feet offering spa-type amenities along with typical fitness club services and offerings.

Companies such as Lifetime Fitness, LA Fitness, 24-Hour Fitness, and Equinox give a consumer a country club-type atmosphere with restaurants, spas, personal services, etcetera. There is also strong activity in the more budget-oriented health clubs such as Retro Fitness, Planet Fitness, Crunch Fitness, and Blink Fitness, typically offering a 15,000 to 20,000 square feet “no frills” environment, with a clean and well equipped fitness center.

Another strong trend, as I mentioned before, are the fast–casual restaurant concepts such as Noodles & Co., Sarku, Panda Express, Corner Bakery. and Smashburger, to name a few. Additionally, the self-service frozen yogurt franchise keeps multiplying because of the high profit margin and minimal operational and employee cost.

The supermarket retailers are being very aggressive as well. There are distinct offerings from the lower price point offerings such as Aldi, operating in approximately 17,000 square feet, to companies like Fairway Supermarket operating in approximately 55,000 square feet.

These tenants are able to get into the urban markets with smaller space requirements and multi-level layout abilities. Fairway is a great example of what consumers have come to expect from these supermarkets, including normal and organic food products along with a great display of prepared foods for on-premises and off-premises consumption, an in-house bakery, a cheese department and a fresh bean coffee display. Wegman’s Supermarket is operating in over 120,000 square feet and offering space for other boutique stores within its store, giving consumers a wide selection of all types of products.

The trend of downsizing has also continued by retailers who are looking to maximize sales per square foot. Some of these retailers have been affected by the continued increase in Internet sales. A couple of examples are Staples, who has been operating in 20,000 to 24,000 square feet and are now downsizing to 15,000 to 12,500 square feet, and Best Buy who has been operating in 40,000 to 50,000 square feet and are now looking at stores as small as 30,000 square feet.

Over the last few years, it was definitely a tenant’s market due to the lack of expansion growth by many retailers during the recession. However, there has been a large shift in the marketplace and there is now a shortage of good available retail space as a result of the lack of new shopping centers being developed in the last few years and infill of the previously available space. That said, it is now a landlord’s market.

April 22 2014