Feb 02

Big Gains For Small Shops

Open-air landlords report strong growth among mom-and-pops

Small-shop tenants took a hit when credit dried up after the 2008 financial crisis. Now, a decade later, some landlords are reporting record-high occupancies and rents for these operators, generally defined as those leasing space of 10,000 square feet or less. The gains are attributable to a robust economy and to such trends as consumer obsession with beauty, health and fitness, experts say.

“Our portfolio of more than 30 million square feet has the highest occupancy it has ever had, not to mention the highest [rental] rates.” said Jenny Cushing, vice president of leasing for Pheonix-based Vestar, a privately owned development firm with stakes in about 70 properties. “The majority of the deals we have been doing are with the smaller-format retailers.”

In October Kimco Realty Corp. said its expanded pro rata small-shop occupancy hit a record high of 90.8 percent during the third quarter. These gains are an increase of 130 basis points over the 89.5 percent small-shop occupancy rate Kimco reported for the 2017 comparable quarter, according to a press release. (For further comparison, the firm’s pro rata occupancy for small-shop tenants stood at 83.9 percent at the end of the third quarter in 2012.) New Hyde Park, N.Y.-based Kimco has stakes in 450 U.S. shopping centers, comprising some 78 million square feet of leasable space.

Regency Centers Corp., for its part, has posted a small-shop occupancy rate of 92 percent or better for the past six quarters, including 92.3 percent for the third quarter of last year. In a third-quarter earnings call, Jim Thompson, Recency’s executive vice president of operations, cited five years of growth in net rents for these operators. “We’re seeing demand for space across all categories from many thriving tenants,” Thompson said. Jacksonville, Fla.-based Regency has stakes in 426 properties, totaling roughly 58 million square feet of gross leasable area.

The strong performance of small-shop tenants is visible across the greater Houston market but is particularly noteworthy inside the Beltway 8 perimeter, says Jason Baker, co-founder of Houston-based tenant-rep and development firm Baker Katz. “We’re seeing all-time highs with respect to small-shop occupancy and rental rates,” Baker said. This holds true among tenants at Baker Katz’s own shopping centers in and around Houston as well, he notes. The company has had a hand in the development of roughly 75 projects.

Almost universally, experts say, the fastest-expanding small-shop tenants fall into categories related to beauty, fitness, health-and-wellness, daily-service needs, or food-and-beverage. Rapidly expanding operators include Amazing Lash Studio, Club Pilates, Drybar, Fyzical Therapy & Balance Centers, iLoveKickboxing, Orangetheory Fitness and SoulCycle, to name a few. Orangetheory’s rollout, they say, has been particularly aggressive: The company reportedly has roughly 1,000 locations worldwide, nearly 900 of which are franchised-owned.

The franchise model, in fact, brings advantages that support occupancies and rents among small-shop tenants, says David Jamieson, COO of Kimco. “That is one things that, coming out of the last downturn, provided really successful for mom-and-pop businesses,” he said. “A good franchiser can provide a lot of the tools and support that you need to get you into the market and gain some visibility. That then frees individual owners to focus on just running a solid business.”

Franchises like My Salon Suite and Phenix Salon Suites put a twist on the model, Jamieson adds. These concepts allow multiple nail technicians, hair stylists and others to operate their own businesses inside a single salon. “It lowers these individuals’ overhead and helps drive business to their specific chair or unit within that salon suite concept,” Jamieson noted. “It’s a model that gives people more opportunity to focus on what they’re great at: their technical skill.”

Cushing says the rise of Instagram, Snapchat, YouTube and other social-media sites also helps explain the rapid growth of beauty or fitness tenants. “People are spending more of their disposable income on their physique and personal appearance than in years past,” she said. “Vanity has taken more of a driver’s seat. People are highly aware of their physical appearance, because they know it is being broadcast widely across social media.”

But when it comes to gains in small-shop occupancy, not all landlords benefit equally. Generally speaking, experts note, most of the largest public and private owners of open-air shopping centers continue to pursue major-market strategies. They are selling off lower-tier properties located farther away from city centers even as they acquire, develop or reinvest in blue-chip properties in the densest markets. Kimco, for one, disposed of some $900 million worth of assets over the course of 2018, Jamieson noted. “We’ve had a large, concerted effort in refocusing our portfolio,” he said. “Its quality has improved dramatically in conjunction with all of these other demand drivers.”

In the types of urban markets that Kimco, Vestar and other landlords are pursuing, high barriers to entry constrict the supply of new retail space and promote higher occupancies and rents among smaller-format retailers. “This truly is about supply and demand and the flight to quality,” Cushing said. “Virtually no new product has been built [in major metro markets] over the past 10 years. It’s very competitive these days, especially in the class “A” and “B” centers.”

In Greater Houston, these dynamics help explain why rental rates are strongest inside the Beltway 8 perimeter, says Baker. In addition to city officials’ keeping a tight rein on entitlements for new retail supply, multifamiy developers are gobbling up space all over the city. “In Greater Houston right now, which is made up of about 10 counties, there are over 200 sites under contract for multifamily development,” said Baker. “With what these multifamily developers are willing to pay, it creates some real challenges for future retail development. There’s not a ton of new retail space being added to the market.” Meanwhile, tough new development restrictions put in place out of flooding concerns after Hurricane Harvey in 2017 are constraining supply even further, Baker says.

Little wonder that landlords emphasize the importance of using competitive strategies to woo fast-expanding tenants like Orangetheory or MOD Pizza. At Vestar, leasing teams are clustering tenants into “beauty districts” where visitors can get their hair and nails done, go to a cosmetics consultation, sweat through a power-yoga or high-intensity training workout or visit a juice bar. “The idea is to work from top to bottom and inside out,” Cushing said. “Our beauty districts have been very successful. They create synergies among like-minded customers.” The districts can also help Vestar win the competition for promising tenants that want to co-locate with such services, she says.

Vestar’s leasing teams are trained to cater to the different needs of small-shop tenants as well, Cushing says. Most super-regional malls have fairly strict covenants when it comes to design and appearance of tenant spaces, but at Desert Ridge Marketplace, in North Pheonix, Vestar was flexible when Barrio Queen, a Mexican restaurant and tequilería, asked to be allowed to paint colorful street-art murals on exterior walls. “We wanted to try to give them as much latitude as we could so as to not stifle that creativity and individualism,” Cushing said. “That’s what makes them unique.”

And while national tenants might be accustomed to dealing with landlords’ interminable leases or stats-filled email blasts about available spaces, Vestar’s leasing teams strive for something more personal when dealing with mom-and-pops, says Cushing. That could mean using a less intimidating short-form lease, or visiting in person to chat about leasing opportunity. “Typically, with the small-shop retailers, you have to change the way you normally do business,” Cushing said. “You need to bring it to a more personal level, because this is often their entire livelihood. We like to put our phones and computers down and go meet with them.”

Today’s gains in small-shop occupancy rates owe much to improvements in retaining tenants over time, not merely to signing on the latest concepts, according to Jamieson. In Kimco’s case, he says, maintaining high standards at the shopping center and offering best-in-class marketing and events can help guarantee that tenants will be eager to renew their leases. “Our retention levels have improved, which is a further testament to the strengthening economy and the bettering of our shopping centers,” Jamieson said. “We want to ensure that we are creating that inviting experience that will help drive the success of our retailers – and also draw new tenants into our centers, over those owned by someone else.”

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