As we start this new year, the pace of retail development in the marketplace shows no signs of slowing down.
Gone are the days of speculative construction in geographic areas where growth is expected to take place. Instead, we’ve seen good sites and existing space in core markets utilized and absorbed, as retailers and restaurants steadily catch up to consumer demand.
Demand is so high that the RBC Capital Market Report recently estimated that around the country, retailers plan to open almost 80,000 new stores over the next two years — a staggering number. Restaurants are leading the charge in new development.
The focus on development continues to be on sites in dominant retail corridors, and since many users have essentially the same site criteria, it creates price pressure and a shortage of available sites. This means developers must become more creative in site selections.
1. How is the focus on high-quality locations impacting the real estate development process?
High-demand locations continue to dominate. Consequently, available sites in these areas tend to get a high level of interest from buyers. In many cases, retailers and restaurants relocate from under-performing locations, which means more retailers are looking to move to the same prime spots.
These conditions are why it’s important to identify a range of sites that fit the criteria for the retailer you are working for. This is a strategy Halpern uses to locate sites and create value from the start of the development process for the clients we serve.
2. What can industry professionals do to manage rising costs?
As development and construction costs continue to rise, returns get squeezed. At the same time, sites often contain challenges to be overcome — which is why it’s critical to have quality architectural and engineering partners on your team who can help value-engineer a project from the start.
Ultimately, the retailer or restaurant makes a decision based on its own economic model. Those models vary across the board, so it’s important to have quality partners from the start to maximize a project’s potential value.
3. What are the sweet spots in the marketplace right now?
Outparcels and parking lots where you can build represent some of the best options for creating successful projects in prime locations. “Carve-outs” are situated within the parking lot of a retailer, and though they are more complex projects to complete, they can yield good results for the developer and retailer.
4. What are some smart strategies developers should use in the year ahead?
If a site holds more potential for a different type of retailer than with the current retailer, it could make economic sense to buy the site with an existing tenant and relocate the tenant, or buy out the lease and repurpose the property for a better user.
In one example from my experience, an owner replaced a large casual dining chain’s location in Columbia, Missouri, with a new Chick-fil-A, which required scrapping the existing building and having the new location built from scratch. The payoff: The Chick-fil-A that replaced it has significant drawing power for the center and creates new traffic that would not be there otherwise.
Doing this is more complicated from a legal and planning perspective, but it’s worth considering as it can create substantially more value for both the retailer and developer.
Marc Kirchhoff, CCIM, is a Vice President at Halpern Enterprises, leading the company’s build-to-suit retail development division which finds and develops sites for national tenants.
This piece was originally published in Shopping Center Business.