How are Retail Spaces Addressing Lease Renewals Right Now?

A business sign that says Open on cafe or restaurant hang on door at entrance. Vintage color tone style.

Since the pandemic, planning for the future has become incredibly difficult. Whether it’s the one-month outlook or one-year forecast, uncertainty looms over every prediction.

2020’s widespread barriers to foresight have been causing troubles across the board. However, the impacts have been particularly intense for commercial real estate leasing.

As a result, today’s leases are more creative than ever: new clauses have been added, lease timelines have adjusted case-by-case, and a general atmosphere of openness is reshaping CRE.  

This flexibility has given rise to new leasing trends that vary sector-by-sector. Unique and specialty lease terms are arising across the entire commercial industry, but some sectors are handling renewals with greater tact than others.

Retail: Pivoting at Renewal Period

The retail sector has been particularly resilient in developing creative solutions for today’s biggest leasing challenges. Right now, retail spaces are flexing new approaches to lease renewals.

Retail’s ingenuity can be linked to the specific difficulties this sector has faced in 2020. Brick and mortar retail was in a tough spot during the pandemic. E-commerce gained the upper hand as shoppers stayed home and opted for remote services. Meanwhile, retail property owners were struggling to keep their tenants from abandoning their physical spaces.

While some brands are choosing to go remote, others are holding onto their commercial real estate. CRE spaces are being viewed as essential to retail – but that doesn’t negate the persistent uncertainty. This situation has prompted retail tenants and property owners to work together to cope with today’s biggest challenges to commercial leasing.

Here’s a look at a few of the ways that retail spaces are approaching lease renewals right now:

Short-Term Leasing

The primary response to 2020’s lease renewal challenges was opting for shorter commitments. Typically, retail leases range from three to five years in duration. However, with five years feeling like a lifetime away, property owners and tenants reverted to one-year timelines.

Short-term leasing was the immediate way that the retail sector pivoted according to the pandemic’s hazy outlook. Shorter commitments meant lessened risks, making this a key strategy for tenants.

However, property owners took a hit. In times of uncertainty, it’s safer to have a portfolio of long term leasing contracts. These single-year leases were far less stable – but in the circumstances, it was better than no lease at all.

More Time, Lower Price

In order to solve the problem of shorter leases, property owners have made another compromise.

Today, CRE owners are offering lower rent rates for longer leases. This means a tenant gets a better deal if they opt for a longevous contract. While it does reduce the asset’s annual returns, it also keeps rent pouring in – which can be a vital lifeline during a crisis.

This trade-off is proving successful for the property owners and tenants who are trying it out. It’s attracting tenants and prompting them to sign for longer durations. The longer timelines is giving property owners a stable stream of income for years to come.

What’s coming next? To find out, be sure to keep your eyes on the new trends emerging in retail leasing.

What Does the Shopping Mall of the Future Look Like?

Shopping malls have been at the forefront of commercial real estate conversations for years now.

After a seemingly endless discussion, the future outlook of the American shopping mall remains hazy. We still don’t know exactly what will save malls and bring these public shopping centers back into the spotlight for consumers.

A New World for Malls

Back in 2019, many predictions were made. The most prominent forecast for retail’s revival of the shopping mall was based on experiences. Fun, social, personalized, and specialty – malls were to become a place where you could do it all. Prominent retail brands were teaming up with eateries and entertainment companies to offer a totally new era of mall culture.

However, 2020 happened – and those predictions quickly became irrelevant.

When the coronavirus pandemic hit the commercial scene with unexpected intensity, the needs of the American mall took another drastic turn. Right now, the attention has shifted away from luxury experiences and towards health, wellness, and safety.

These pressing demands have changed the course of mall development, but they’ve also added a welcomed dose of certainty. Unlike the quickly passing trends of experience, the ‘new normals’ of the coronavirus are here to stay.

CRE’s retail sector now has a better idea of where to take malls than it has in years, and these actionable items are set to reshape malls in 2021 and beyond.

Here’s an idea of what the malls of the future will look like:

The Rise of Omnichannel

The trend of omnichannel retail has been growing since 2018, but as we move forward, it will become standardized. Brick and mortar will continue to team up with e-commerce to meet consumer demands and keep up with industry competition.

Delivery, BOPIS, and same-day pick-up options for online orders will restructure the way shoppers interact with malls.

Blending with the Medical Space

With COVID-19 displaying immense resilience, health and safety will remain top of mind within mall development.

The addition of minute-clinics and small scale medical offices into the pool of mall tenants is expected to rise in 2020. Not only does this assist in promoting health and wellness for shoppers, but it will also coincide with the growing med space trend of smaller, more accessible offices.

Offering quick and convenient services combined with the need for COVID safety measures will initiate a blend between malls and CRE’s medical arena.

Multifamily Collaborations

The med space isn’t the only sector that is forecasted to merge with malls. Multifamily will also be taking steps to rebuild the modern mall as on-site living options are integrated within these commercial sites.

Multifamily is eyeing malls as a potential place to develop lifestyle communities. Whether the development projects completely recycle a weak mall location into an apartment site or retail and multifamily will be blended in a single asset will vary between projects. This trend of combining work, life, and play into one model is expected to reverberate throughout CRE in 2021. What are your predictions for the next phase of retail’s mall scene?

What Levi’s New Retail Stores Mean for the Sector

What Levi’s New Retail Stores Mean for the Sector

Retail apocalypse, who? CRE’s retail sector is undoubtedly reinventing itself, but that doesn’t mean brick and mortar retail is going extinct. On the contrary, more and more brands are announcing big plans to open up physical store locations.

The latest is Levi’s, who plans to open hundreds of stores by the time 2019 comes to a close.

Let’s explore what this means to retail as a whole.

Why Turn to Physical Retail?

If you’re listening to CRE retail news, you know that the value of brick and mortar stores is a hot debate. So why in the world would Levi’s choose this as their next big move?

It’s all apart of the popular clothing brand’s strategy to reconfigure the way they’re doing business. Recently, their wholesale profits are on the decline as the department store concept is struggling to keep above water.

However, the company is thriving in other areas. Direct-to-consumer performance is up 7% as Levi’s remains a popular household brand for US patrons. Levi’s reports that their e-commerce sector is thriving and their sales at full-price stores are also strong.

Experimenting with Small Footprint Stores

As the entire industry is struggling to find the solution to the issues plaguing contemporary retail, Levi’s might be onto something.

The company has plans for its 100 new stores. Levi’s is looking to test out the small footprint store and see how it competes with their other outlets. Levi’s CEO Chip Bergh states:

“Growing our U.S. direct-to-consumer business allows us to move toward premiumizing the marketplace, and remains one of our important strategies to offset headwinds in U.S. wholesale by continuing to reduce our concentration in that channel.”

By testing out the waters as with brand-centric storefronts, Levi’s is establishing themselves as an independent luxury clothier. Stepping away from discount stores and department stores, the company wants to see if consumers will be open to paying full price at a small Levi’s locations.

They are switching up their target audience from the discount shopper to the boutique browser, hoping to capitalize on the in-store experience that can only be achieved in physical retail.

How Will This Impact Other Areas of Business?

After looking at the factors motivating Levi’s to open up physical locations, what about their online presence?

By opening up new stores that their consumers can visit in person, Levi’s is adding a whole new layer of consumer experience to their business. These stores will help boost brand awareness and can strengthen their online presence through engagements, events, and promotions.

Levi’s will also be able to jump on the BOPIS train, which has been boosting both physical and online sales for the past year. Giving consumers the option to integrate their online and in-person shopping experiences inevitably drives traffic to their sites and store locations. This convenience-based strategy benefits both platforms – it’s a double win.

Making Connections

Using Levi’s as a module to gauge the retail industry, we can see that today’s business is all about playing it smart. Ultimately, the companies who are actively responding to their data metrics and aligning their strategies with what consumers want are the ones who will survive retail’s changing tides.

What’s your take on today’s retail scene? For more CRE insights, explore our blog.

2016 Predictions for Cleveland Commercial Real Estate Market

NAI Daus_2016_1_HR-2By Ira Krumholz
President, NAI Daus Property Management Division
ikrumholz@naidaus.com

Momentum was certainly a key word last year. At the top of the list was the great positive momentum associated with Cleveland’s multifamily sector. Much of this was associated with Cleveland’s central business district, which grabbed most of the headlines. During 2015, nearly 500 new units were completed in the downtown area, but despite this additional inventory, occupancy rates continued to hover near 100 percent. There are approximately 275 units under construction with another 4,000 in various stages of planning. While new apartment construction outside of downtown has been limited, occupancy rates are also strong across the region averaging in the mid-90 percentile for most areas.

The industrial sector also had a strong year, as illustrated not only by high occupancy rates and increasing rents, but also with nearly 1 million square feet of speculative construction underway. Examples include new warehouse facilities in Euclid, Twinsburg and Stow – all of which were started without substantial leasing commitments in place.

The retail sector has also recovered nicely with several new retail developments underway. These include projects such as Pinecrest in Orange, Costco and Bass Pro Shops in Boston Heights and Cabela’s, Menards and Meijer in Avon.

The fourth primary commercial sector, the office sector, is the only one that has been a mixed bag. On the positive side, the overall level of leasing activity has picked up and certain traditional office corridors are performing well. However, there is still a substantial amount of vacant office space in the market and overall job growth in the office sector has been sluggish.

Looking ahead, a key word for 2016 is – cautiously optimistic. The commercial real estate market is approximately 24 months into this current expansion. Considering the depth and breadth of the most recent historic downturn, it is reasonable to think that the expansion will continue for at least another 12 to 24 months. This isn’t to say that sale prices and lease rates will increase at the same pace that has been illustrated over the last few years. In general, the velocity for both leasing and sales activity should remain solid throughout 2016.

Each commercial real estate sector is at a different place and each faces some risks. The multifamily sector is clearly the furthest along in terms of recovery and, as such, poses some potentially significant challenges. One of the largest is the threat of over-building, especially in the downtown area. While the demand has outpaced the supply, the projects that are in the development pipeline are more complex and thus, more expensive. There is a clear danger, not only that supply will start to exceed demand, but also that the rental rate needed to support these newest projects will be higher than the market can support. Click here to download the entire article.

Valuation of Real Estate Assets

VALUATIONOFREALESTATEWritten by Ira Krumholz, CPM®
President of NAI Daus Property Management Division
ikrumholz@naidaus.com
Twitter @IraKrumholz
216-455-0905

Determining the value of a real estate asset is never an easy thing but the historic free fall in real estate values a few years ago and subsequent uneven recovery has made this task significantly more difficult. This month, we are going to discuss how a tumultuous market can impact the traditional approaches to determining value – cost approach, sales comparable approach and income capitalization approach. Before we do, a brief discussion of the three primary types of value is in order.

Market Value. This represents the most probable price, at a specific date, which a property should sell for after reasonable exposure in a competitive market under all of the conditions for a fair sale. There are a couple additional things to note. First, neither buyer nor seller should be under any duress, with both parties knowledgeable and informed. And second, the price should be based on the property’s highest and best use, which may or may not be the property’s current use.

Investment Value. This type of value is all about the value to a specific purchaser, with little regard to the larger overall marketplace. One example of this would be a purchase by an investor involved in a 1031 tax-deferred exchange. Motivated by the deferral of a tax consequence, a trade buyer is typically willing to pay more for a property as compared to a traditional buyer. Another example would be a property owner that controls almost an entire block of property, except for one parcel. The owner would typically be willing to pay more for that outstanding parcel as compared to a traditional buyer. Click here read entire article. Click here to read entire article.