Retail Space Availability Reaches New Low, Retail REITs Enjoy The Competition

Low consumer sentiment, inflation and high interest rates combined spell trouble for retailers and their landlords, but low supply of available retail property has created something of a bright spot, at least for property owners.

Although retailers struggled before and during the pandemic, a lack of new development created a growing supply problem in many parts of the U.S. The overall availability rate for retail fell to 5%, according to CBRE's third-quarter market report, the lowest since the firm began tracking that metric in 2005.

“There’s still a lot of demand out there and in a lot of ways this might be the best leasing environment we’ve ever seen because of the depth and breadth of the retailer demand and the lack of supply,” Kimco Realty Corp. CEO Conor Flynn said during the company’s Q3 earnings call.

Still, consumer spending habits matter for retail REITs, particularly those with assets in areas where salaries are lower, making price increases caused by inflation more prominent.

During its Q3 earnings call, Federal Realty Investment Trust CEO Don Wood noted that shopping centers with demographics below $75K in household income are seeing strained performance compared to their $150K household counterparts.

“There is no doubt in our mind that those shopping centers struggle more than the ones that have $150K and $160K of consumer — of household income,” Wood said.

A lack of supply could cause a burst of leasing agreements in the near term as tenants are more apt to lock in for longer-term leases as a result of less overall availability.

Kimco, for example, noted strong performance in conversions with 146 new leases signed totaling 620K SF.

The challenges faced by some retailers could open up more space for those seeking it. Bed Bath & Beyond announced that it would shutter 150 stores earlier this year, which could be a boon for other large-format retailers seeking space.

“In the event we are able to recapture these Bed Bath & Beyond spaces, we have a variety of backfill candidates such as grocers, dominant omnichannel players or off-price retailers, many of which have already showed interest in those boxes,” Flynn said during the call.

However, rising financing costs are likely to keep a lid on new development for the foreseeable future, keeping the construction pipeline low. The difficult lending environment is likely to push smaller developers to seek partners, Regency Centers Corp. President and CEO Lisa Palmer said during her company's earnings call.

“And so, we are starting to have a rising number of incoming calls to potentially partner and help be that source of funding for these smaller developers. So, it's very different than actively just seeking JV development partners,” Palmer said.

For some REITs, smaller is better, as retail tenants under 10K SF led to standout performance, as was the case with Macerich, according to comments from Senior Executive Vice President and Chief Financial Officer Scott Kingsmore.

“We are pleased to report another strong quarter, with the majority of our operating metrics trending very positively. After a very strong first half of 2022, we also had a solid third quarter. We saw robust retailer demand. Tenant sales were flat in the third quarter. However, our portfolio average sales for tenants under 10,000 feet were $877 per foot, our highest level ever,” Kingsmore said.

Simon Properties Chairman, President and CEO David Simon said that brick-and-mortar retail is poised for a comeback, with e-commerce sales down.

“And if they're in the retail business and they want to grow, they're going to open stores, and it's that simple because the returns on e-commerce just aren't quite what everybody talks about,” Simon said in the company’s Q3 earnings call.