JLL: Retail Closures Present Opportunities for New Retail, New Uses

The retail sector’s softening fundamentals are changing investment activity, said JLL, Chicago.

Though both investor and consumer sentiment have leaned positive in 2018, retail property transaction activity remains “cautious” due to stricter acquisition criteria and increased risk sensitivity, the JLL Retail Outlook report said.

“Essentially, star assets in top markets are still highly sought after by investors,” JLL said. “Smaller secondary and tertiary markets, in contrast, are seeing fewer deals. With more risk present in the retail sector and few core assets on the market, institutional and REIT investors are shying away from retail purchases–due, in large part, to lack of opportunity.”

But private investors are still “jumping at the chance” to acquire quality retail assets, JLL said. High-net-worth individual transaction volume increased 35 percent year-over-year.

While grocery-anchored centers remain most desired by retail investors, pricing has softened except for best-in-class assets, JLL said.

Discussing retail space that has recently become vacant, the firm noted three main outcomes: re-leasing by other retailers; re-leasing by non-retail or service tenants; and repurposing or demolishment.

First, re-leasing by other retailers. As some retailers shutter their stores, others are flourishing and expanding theirs. Value and discount retailers such as supercenters, off-price retailers and dollar stores remain popular with consumers and are moving into new locations and markets, JLL said. And some formerly online-only retailers are moving toward bricks and mortar, including mattress retailer Casper, which plans to open 200 physical stores in the next three years, and men’s apparel store Untuckit, which will open 100 new locations by 2022.

Other vacant retail space has been re-leased by non-retail and service tenants. “The growing focus on ‘experience’ has led to a rising share in non-retail tenants, including food and beverage, salons, movie theaters, fitness centers and medical clinics,” JLL said, noting a recent study found non-retail and non-restaurant space in shopping centers increased from 19.2 percent to 23.1 percent between 2012 to 2018.

Shoppers say these “service tenants” make shopping visits more enjoyable and efficient; 44 percent said they prefer to visit shopping centers that have a wide variety of non-retail tenants, JLL reported.

Finally, some retail centers are poorly situated or do not have the demographics or infrastructure to continue in their current form, JLL said. Overbuilding in pre-recession years led to a glut of retail locations in some areas; U.S. gross leasable area per capita at 23.6 square feet is more than double runner-up Australia’s 11.2 square feet of retail space per capita. “Fortunately, developers have pulled hard on the construction reins and current development activity is still much lower than it was prior to the Great Recession,” JLL said, noting 71.2 million square feet of retail space under construction at the second quarter’s close, down nearly 15 percent from year-ago levels.

Total retail deliveries fell more than 40 percent year-over-year to 11.6 million square feet. “In some cases, old and defunct retail space is being redeveloped into mixed-use developments with multifamily, office and hospitality components,” JLL said.