The Real Estate Bubble Could Lead To Thriving City Centers In Secondary Markets

As the first quarter of the year nears its end, publicly traded retailers are reporting Q4 earnings that not only missed analyst estimates, but reflected a decline in same-store sales that has led to a huge wave of store closures rivaling that of the recession.

CEOs are saying the bubble has burst and commercial real estate experts are in agreement, saying retailers today are paying the price for lofty expansion plans set in motion during the early 2000s.

CoStar Group real estate economist Ryan McCullough said overambitious expansion plans coupled with the slowdown of the Great Recession and the growing prevalence of online shopping has taken its toll on the sector. “The overreaching retail strategy during the last cycle was expansion,” McCullough said. “We saw rapid growth in store count and not necessarily in the strongest locations.”

City Centers In Secondary Markets

Retailers’ rapid build-out plans were in many cases an effort to appease investors and boost stock prices and analyst ratings — but these plans have led to less productive stores that are stretched too thin in many cities — particularly secondary markets.

“There’s a middle market excess of stores that [shoppers aren’t] traveling to either because the population is shifting back to urban cities or because they’ve got six of them and the area only needs two,” said Colliers International's Jawara Partee, director of tenant representation in the U.S.

Partee said these secondary cities have an abundance of retail real estate and not enough foot traffic to generate sales or justify keeping struggling stores open. Couple those struggles with the fierce competition of e-commerce and it is easy to understand why retailers are restructuring and shedding their portfolios to position their profitable stores for success.

As a result, Partee said the industry can expect a proliferation of city centers within Class-B space in secondary markets. These centers typically include an array of tenants that cater to shoppers' needs — including grocers, apparel retailers, service-oriented tenants such as banks and nail salons, and entertainment-focused and experiential tenants.

“The secondary spaces are going to be turning into things that we’ve seen more in Europe and the Middle East. Lots of these malls turn into city centers. [People] went there for shopping, entertainment and to see the dentist,” Partee said. “It’s the place you go to congregate — almost the way the tertiary properties are working currently.”