Wednesday, November 20, 2019

The Replacements: Avoid the Big Gorilla

This past decade has been a revolving door of retail tenants closing stores, followed by the ensuing scramble to fill the empty spaces left behind. We all recall the days of large format retailers such as Linens ‘N Things, Circuit City, Borders, Filene’s Basement, Office Max and, more recently, Sports Authority and Toys R Us. There are many more we could add to this list.

And then we have Sears, JCPenney, and Macy’s: the major department store companies that were blind-sided by the impact of ecommerce and the attitude reversal of shoppers that had grown up on regional malls. More closings resulted. Exacerbating the problem was that these were all large format vacancies that needed to be filled. A certain degree of panic set in among landlords who had to find viable replacements in a retail world that was in a state of disarray. Who would they find?

In many cases they called on low rent payers, retail “bottom feeders” if you will, that once would never have been considered viable candidates for the better power and community centers which traditionally catered to the type of tenants noted above. But then things changed again: the more attractive target tenants now included familiar names such as Burlington, Ocean State Job Lot, Tractor Supply, and Big Lots. When things improved a bit, other more desirable candidates came to the forefront, such as Target, Hobby Lobby, Whole Foods, Dick’s Sporting Goods, and the TJX divisions. Also, there were newcomers to the market that helped eat up vacant space, including At Home, Floor & D├ęcor, and PGA Superstore. However, even the recent proliferation of viable retail replacements hasn’t been enough to fill all the vacancy built up over the past 10 years.

So landlords reached beyond general merchandise and grocery prospects and actively pursued entertainment venues - not only more traditional movie theaters, but also trampoline parks, bowling venues, adventure parks, and escape rooms – as well as medical uses and fitness centers. These tenant types have one common advantage over traditional retail tenants: what they provide to fulfill customer needs and desires cannot be purchased online; they’re “gorilla proof” (as in the 900 lb. variety whose name begins with an A).

Growth in these retail tenant categories is clearly evident when we review the annual results within our proprietary GRIIDTM retail database. The Health & Fitness category has been the most consistent winner for more than a decade with respect to square footage gains in Eastern Massachusetts/Greater Boston. Going back as far as 2007, this category has been consistently ranked in the top five. In fact, in the past ten years it’s made it into the top three in all but one year.

The Amusement & Recreation category, better recognized today simply as Entertainment, has also come to the forefront in recent years. While movie theaters and bowling alleys have always been a big part of the Entertainment industry, we are now seeing significant upgrades to these venues compared to years past. Theater offerings now include reclining seats, bar service, dessert menus, and reserved seating. Bowling facilities are incorporating luxury bowling with live music, larger-than-life sports viewing, billiard tables, and retro-video gaming. In more recent years, the entertainment category has broadened to include trampoline and adventure parks and escape rooms. These newer venues have helped push Entertainment space in the region to the top position in our annual rankings in three of the past six years and to the top ten nine times since 2009. The other strong growth category worth mentioning is Medical & Dental Services. In the past 15 years, this category never ranked in the top 10 until 2014. Since then it has ranked among the top six every year, including two first place finishes. Urgent care centers, dental offices, doctors’ offices, and other medical uses have been the main drivers as landlords hunt for non-retail uses to fill unoccupied space.

In reviewing the vacant spaces over 10,000 square feet that exist across all three KeyPoint Partners GRIIDTM regions, which includes just under 400 units, we identified 29 spaces that have commitments from tenants. While these new tenants come from a variety of categories, seven come from the Entertainment category, including four trampoline parks of various brands. Also included are a movie theater and a Dave & Busters. There also will be five Health & Fitness tenants added later this year and early next year, including three Fit Factory locations. While there are no spaces larger than 10,000 square feet with medical use commitments thus far, there are 10 commitments for smaller units, including urgent care, physical therapy, dental clinics, and other doctors’ offices. The remaining larger format boxes are earmarked mainly for grocery, pharmacy, and restaurant uses, although there are commitments for a number of these spaces from Target, Marshalls, and Ulta Beauty, all dominant retailers within their respective merchandise lines.

The telling point in all of this is that there are opportunities out there for landlords to fill vacant retail space, but it’s best to find the kind of tenant that is Amazon-proof…in other words, avoid the big gorilla!
Bob Sheehan, Vice President of Research

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