Medical Occupiers, Grocery Stores And Drive-Thrus Among Most Desirable Pandemic Retail Tenants

As Los Angeles retail owners and tenants head into a new year with many of the same coronavirus pandemic challenges and vacancies to fill, hot-commodity retail tenants have still been paying rent, and some companies are even looking to expand. When it comes to desirable tenants, “essential” is key, experts say.

One unsurprising hot tenant that fits the bill: grocery stores. In many cases, these stores have profited from the stay-at-home orders that have been in place over the last 10 months in LA.

“Grocery stores and drugstores have always been in demand, but they are in a particularly high demand now because of their ability to stay open over the last year,” CBRE Senior Vice President Alex Kozakov said. 

Retail centers that have a grocery component have done well because those centers have stayed relatively busy and those tenants have largely paid rent, Paragon Commercial Group principal Jim Dillavou said. Paragon Commercial specializes in retail centers anchored by “daily trips-driven” stores like a grocery store.

“We kept our overall portfolio rent-paying north of 95% during the entire pandemic, which is pretty amazing because we’re in the retail business,” Dillavou said. 

National retail rent collections rates have bounced back, going from 80% in Q2 to 95% in Q3 for free-standing retail and from 61% to 82% for shopping centers, CBRE’s Q3 2020 data showed. CBRE noted that Q3 numbers were now “closer in line with other property types.”

Essential isn’t just grocery stores and drugstores, though. Medical occupiers were moving into retail centers before the pandemic started, but now the sector is making a “big push” into retail space. Retail center locations are desirable in large part because of access to plentiful free parking, Kozakov said. 

Drive-thrus, which have been able to maintain a high percentage of their business throughout the back-and-forth closures, are also in demand. Starbucks has said that by 2023, 45% of its domestic stores would feature a drive-thru. Several major fast-food chains are betting on their appeal persisting after pandemic lockdowns. 

“We’re actively and aggressively looking for sites that would be viable for their use, but if it doesn’t have a drive-thru component, we don’t even consider it,” said SharpLine Commercial Partners President Barbara Armendariz, who represents McDonald's in much of LA County.

Discount tenants like 99 Cents Only Stores are also on the hunt for sites but are especially looking for good lease rates, said Armendariz, who is working with the chain.

“We’re being opportunistic now,” Armendariz said. "We may be able to expand and get better rates because there’s going to be a lot more vacancy."

Vacancy rates for the greater LA area were around 3.8% in Q3 2020, according to a CBRE retail report from that quarter, the most recent available data. But the rate varied greatly from neighborhood to neighborhood. Greater Downtown LA was facing 9.1% retail vacancy. In Mid-Wilshire, it was 8.2%. In the San Fernando Valley, vacancy was 5.3%.

Kozakov attributed the high Downtown and Mid-Wilshire rates to the decline in foot traffic from office workers to retail storefronts in those areas. The absence of office users and mandated closures have been the two greatest impacts on retail storefronts, he said. 

While leasing activity for discount, home improvement and grocery tenants has remained lively, fitness operators and dine-in-oriented restaurants “remain inactive,” according to CBRE. Dillavou said that among restaurants, though, there has been a spectrum of who has been able to pay rent and who hasn’t. Some smaller restaurants that had less dine-in space and were more oriented toward takeout orders have been able to do well in Paragon shopping centers. 

“The less square footage you have indoors, the better,” Dillavou said.

Although the shake-up of the retail landscape is ongoing, experts said they felt that certain hard-hit sectors like restaurants and movie theaters would eventually return to an altered but stronger landscape. 

"Those who emerge from this later this year have weathered this because they were able to innovate in one way or another," Dillavou said. "At the end of the day, this will all have strengthened retail."