Retail Forced To Step Up Its Game In ‘Relentless Pursuit’ To Win Business
Retail is commercial real estate’s comeback kid, but with that title comes an added layer of competition for owners.
After years of pandemic-induced isolation, consumers are once again dining out, shopping at brick-and-mortar stores and opting for in-person experiences. The once-embattled retail sector has responded with a slew of new concepts — so many that real estate owners have no choice but to step up their game as options multiply.
“We are in the business of competing for people’s time and money every day,” Prism Places founder and CEO Stenn Parton said Tuesday at Bisnow's Dallas-Fort Worth Experiential Retail and Mixed-Use Conference, held at The International. “It is a relentless pursuit, every day, to create an experience where your customers and guests actually want to show up.”
After plummeting to unprecedented depths during the first two years of the pandemic, on-site retail spending rebounded in 2022, prompting leasing to pick back up in tandem. Foot traffic is expected to fully recover to 2019 levels by the third quarter, and with supply hovering near record lows, competition for space is fierce, especially in high-growth markets like DFW.
“It’s a great problem to have,” Weitzman Executive Managing Director Bob Young said. “We have limited supply with high demand, so obviously, in some of our assets, we are seeing rent growth.”
Average retail rents in DFW have increased annually since 2020, according to a Marcus & Millichap report. Researchers forecast a fourth consecutive year of rent growth above 2% in 2024, which would lift the asking rate to $19.62 per SF.
Even with properties churning out income, owners can’t rest on their laurels. Developers must stay abreast of new concepts and trends and adjust their tenant mix accordingly, said Jim Dillavou, national head of retail investments at Lincoln Property Co.
“Retail is changing on a daily, weekly, monthly basis,” he said. “If you are on the front end of those trends, you are well positioned to make money.”
Experiential retail was among the concepts that took off in the wake of the pandemic. Competitive socializing concepts, businesses like Topgolf and Chicken N Pickle, increased by 386% between 2021 and 2023, according to a nationwide report by Cushman & Wakefield.
While some had assumed the trend would be fleeting, the businesses have proved their mettle and are now an integral part of a successful retail center, Retail Union partner Larry Leon said.
“Experiential retail is theater, it’s entertainment, it’s community-building,” he said. “Shopping centers are communities, and we want people to spend time there, so between the restaurants and entertainment venues, these can become very powerful.”
Giving visitors plenty of things to do and ensuring uses are complementary to each other is key to a project’s overall success, Dillavou said. The relationship between tenant and landlord has grown more collaborative as a result.
“There is a definitive correlation between the amount of time someone spends and the amount of money they spend at a project — all of those things will drive retail sales at the end of the day,” he said. “As owners and operators, our tenants are our clients. Our job is to maximize their sales.”
The importance of nailing a development’s tenant mix is precisely why De La Vega Development spent several years sitting on a 52-acre site in McKinney. Several tenants had asked to join the development, but it wasn’t until Whole Foods came knocking that CEO Artemio De La Vega finally decided to move forward on the project, dubbed West Grove.
“We wanted a center that was designed to gather people and keep them there,” he said. “We had everybody from Taco Bell to bowling alleys, but we had to remain steadfast and say no to those deals for several years.”
Retail has also become an important component of mixed-use developments, especially in jurisdictions that aren’t friendly to apartments, as city councils will often require ground-level retail before they give multifamily the green light.
Empty storefronts can be harmful to a building’s overall performance, so in situations where this is required, developers should be mindful of their retail partners, said Aaron Stephenson, partner at Retail Street Advisors.
“We’re not well liked. We are the tail wagging the dog, but we are a necessary evil,” he said. “You should bring on someone who understands retail early in the planning process.”
While most asset types are seeing loan volumes plummet, retail is benefiting from a desire among lenders to diversify their portfolios, Dillavou said. With office off the table as a lendable category and others oversaturated, nearly half of existing debt capital is looking for a home. Many of those dollars are being funneled toward retail.
“People overlent on industrial, they overlent on multifamily, they haven’t done retail in 10 years,” Dillavou said. “They’re looking to take their pie charts and make them more equal.”
Retail might be an attractive category, but that doesn’t mean it is an easy business to jump into, Parton said. Fundamentals are stronger than they have been in years, but the sector’s long-term success will ultimately depend on the savviness and grit of experienced operators.
“This business is not for the faint of heart,” Parton said. “This is an operationally intensive business where you are in it with your retail tenants every single day to ensure success. If you can do it, you can see massive rent growth and massive value creation.”
