Status of Retail Leases Today: Good or Bad?

Commercial Real Estate Investing From A-Z

What is happening in the retail space given the high interest rates? Are national tenants still leasing at the same speed as last year? What are some things to keep in mind when negotiating leases in today's environment? James Chung, founder of the econic company shares his insights.

You can read this entire interview here: bit.ly/3Xg8pkE

What is the state of retail and leasing with national tenants in California, in the Bay Area in particular?

From a velocity point, the market has actually stayed pretty high. And I think that would be very shocking for people to hear especially coming out of COVID. However, what was interesting is that we found that, like what happened during the financial crisis in 2008, the Bay Area, because of its fundamentals, is usually the last to fail and the first to recover. And because the barrier to entry has always been so high a lot of national tenants and local tenants, when they see opportunities that were never available historically become available, there becomes a classic supply and demand situation where the opportunities unfortunately are less than the demand. We've actually seen in the better shopping centers, there has been almost an increase in demand for those opportunities, especially for second gen food space. So there has been a lift, believe it or not in occupancy costs for those premier opportunities.

What do you think the plan will be for big spaces that are becoming available?

What we've seen along those lines are a lot of alternative uses that are being proposed and introduced. Things like large pharma medical enter into retail environments where traditionally they would have never done so, we've seen industries like auto want to get in. With the onset of all the EV cars coming into the market, there are many new brands that are looking for showrooms and even sale centers, or service centers. What's great about that new segment is that they do not expose the projects to hazardous materials, because they're not changing oil. They're not fixing engines, they're fixing batteries at the end of the day. My guess is that there will be a return of that demand in the larger format sector sooner rather than later. People are rethinking their execution plans and sizes, and that trend started pre COVID, as we saw a lot of what we called right sizing, those that realized they didn't need as much space as they thought. But as that continues to evolve, I think at some point in the near term we will see a return of a lot of those tenants back into that larger format space.

What do you think owners should be doing to prepare for the next couple of years?

It's important to think long term, not short term. The knee jerk reaction is to transact differently, and while inflation is 100% real, and CPI is at an all time rate, a lot of landlords were reacting by trying to be hyper aggressive with annual increases, redefining how transactions are put together. And while there is merit to that, and it does need to evolve, I think it's also about securing a tenant today for the next 10, 20 years, and working in partnership with them in finding a solution for a healthy ratio and occupancy costs for that tenant. And while that description is not a one size fits all, the complexion of a transaction for a small restaurant tenant versus a 50,000 foot box tenant are completely different.

James Chung

the econic company

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