CBM’s Retail Shopping Center Management & Leasing Blog

Retail Real Estate News & Trends in Southern California
 

Why Fitness Tenants Are Leading Retail Leasing

By Globe St. June 29, 2018

Petra Durnin is the director of research and analysis for the Southern California market at CBRE.

Fitness tenants are driving retail leasing activity in Southern California. According to a new report from CBRE that looked at retail leasing activity, fitness tenants are among the top five retail users in Southern California, and they are expanding. This is a stark change from the activity from this retail segment in the past, when fitness centers were not considered a primary tenant. Today, fitness centers are occupying big boxes as well as smaller footprints and in some cases can even serve as anchors in shopping centers. Last year, there were nearly 1.2 million square feet and 100 transactions of fitness centers in Orange County, the Inland Empire and Los Angeles. This year, there has already been 400,000 square feet in fitness leasing activity and nearly 40 transactions. We sat down with Petra Durnin, director of research and analysis at CBRE Southern California, to talk about the research and what is driving fitness center activity.

GlobeSt.com: Why have fitness tenants become such active retail occupiers?

Petra Durnin: Fitness clients seek more experiential retail options that extend beyond the workout period. Fitness centers provide a service that is internet proof, occupy much of the space left behind from big box/department store closures, fill non-peak retail hours, and attract new customers willing to travel farther for unique fitness experiences. The natural partnership between anchor tenants such as grocers is formed due to the trend towards healthy living. Nearby amenities such as restaurants, coffee shops and personal services attract gym goers, increase foot traffic and sales.

GlobeSt.com: These were once considered undesirable tenants. How have landlords responded to this new demand, and has the lease negotiation or vetting process changed?

Durnin: Fitness retailers have become much more demanding in their requirements for stronger co-tenancy, earlier termination rights, and more exclusive contracts to protect their brand and business. There is also strong demand among budget-oriented fitness clubs that require 15,000 square feet and up to provide a no frills experience and a clean/well-equipped center.

GlobeSt.com: Is the growth of fitness operators enough to absorb the space from some big box closures that we have seen? Why or why not?

Durnin: Big box product appeals to many different types of tenants, but those located in close proximity to amenities that tie in to fitness and health will appeal to gym goers and attract fitness tenants.

GlobeSt.com: Restaurants have been another tenant that has driven retail leasing, but there is some talk about a surplus of restaurant options. Is there any concern about the number of fitness spaces opening or if the consumer demand can support the trend?

Durnin: The rise of health and fitness supports the current growth and options are important in relation to the live/work/play paradigm. Both the aging population and younger generation will further drive the evolution of this sector.

GlobeSt.com: Is this a lasting trend? What is your outlook for fitness center activity?

Durnin: A future trend could be for fitness clubs to locate near residential communities or medical/hospital complexes. They could partner with mixed-use and lifestyle centers with a larger experiential platform instead of traditional retail centers. Boutique fitness clubs could look to diversify further to provide an even more personalized experience with unconventional offerings such as trampoline parks and skydiving centers.


We wish you a happy and safe holiday 4th of July as you enjoy this holiday with your family and friends!


853 Atlantic Avenue, Long Beach, CA

Centers Business Management (CBM) leasing agents, Aaron Guido and Daniel Barriga, recently completed a lease transaction representing the landlord and tenant, a salt therapy clinic, on a 1,152 SQFT freestanding office building. The unit is in a completely remodeled, corner freestanding office/retail building at the intersection of Atlantic Avenue and 9th Street in prime Long Beach. Boasting exceptional curb appeal, this architecturally distinctive property is situated amid a dense residential neighborhood.


8422 Sunland Boulevard, Sun Valley, CA

Centers Business Management (CBM) leasing agents, Brett Mero + David Guardado, recently completed a lease transaction representing the landlord and tenant, an urgent care clinic, on a 1,500 SQFT retail space. The unit is in a corner strip center at the signalized intersection of Sunland and Nettleton, less than a block north of the 5 freeway, in prime Sun Valley. An Acapulco Mexican restaurant and 7-Eleven anchored strip center are across the street. And Mobile gas station is adjacent to the block-long neighborhood center.


Did The Supreme Court Just Save Retail?

By Globe Street, June 22, 2018

WASHINGTON, DC–In September 2019, a mall in Toronto owned by Ivanhoé Cambridge will debut the first Cirque du Soleil Entertainment Group’s concept of indoor family entertainment experiences specially designed for retail locations. Called CREACTIVE, it basically lets shoppers take the stage and flex their inner circus skills. “CREACTIVE is perfectly aligned with our vision for the future of retail: to join forces with the right partners to offer innovative experiences for the benefits of local families and communities,” said Claude Sirois, president, Retail at Ivanhoé Cambridge in a prepared statement.

CREATIVE is the latest example of how retail is remaking the shopper experience by offering exciting experiences and entertainment. Experiences and entertainment, it can be noted here, cannot be disintermediated by the Internet. Retail has been heading in this direction for some time and for many reasons — a main one being the bleeding it has suffered from online sales competition.
South Dakota v. Wayfair

Yesterday the US Supreme Court struck a blow on behalf of physical retailers with its 5-4 vote in the case South Dakota v. Wayfair. Essentially it ruled that US states may impose sales taxes on Internet businesses, even if they don’t have physical locations in those states.

The justices, led by Justice Anthony Kennedy, overturned the court’s 1992 decision in Quill v. North Dakota, which had affirmed the “physical presence” test for state sales-and-use tax collections.

“Each year the physical presence test becomes further removed from economic reality and results in significant revenue losses to the States,” Kennedy wrote. “These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the commerce clause.”
A Game Changer?

At its heart, this was a story about states seeking to recapture lose sales tax revenues as well as one about the supposedly unfair advantage that internet retailers have had for so many years over brick-and-mortar stores that must pay sales taxes.

Now that the Supreme Court has spoken, the question becomes how much of a benefit will physical retail realize?

One thing is for certain: the trend of experiential retail offerings such as CREATIVE is here to stay. Or put another way, the concept and culture of e-commerce is so baked in with consumers that the additional costs that will be imposed will not be a game changer.

“Physical retailers surely will benefit from this decision, but the universal sales tax imposition alone will not be enough to reverse retail’s decade-long slide, in part because consumers already are very comfortable with shopping online, and the lack of sales tax is only a relatively minor consideration in their shopping decisions,” Colliers Chief Economist Andrew Nelson tells GlobeSt.com.
What Sales Tax Holiday?

He notes that surveys by comScore show that the lack of sales tax is the primary factor motivating only 10% of online sales, while free shipping (54%) and the availability of exclusive online deals (23%) are far more important.

Also Nelson says, most consumers no longer enjoy the online sales tax holiday anymore.

“Amazon — by far the dominant e-commerce retailer, with more online U.S. sales than the next nine such retailers combined, according to ecommerceDB.com — already collects sales taxes on all products it sells directly in 45 states plus Puerto Rico and the District of Columbia though not always on goods it sells on behalf of affiliates.” And with other leading retailers having followed suit, as a practical matter most consumers are already paying the tax.

Indeed University of Richmond tax law expert Hayes Holderness tells GlobeSt.com that Amazon quite expertly has flipped the script on e-commerce from “buy it sales tax free” to “buy it conveniently from your home.” “In light of this change, don’t expect the ruling to hurt the growth of e-commerce in any significant way,” he says.

With this Nelson agrees. “The diversion of these sales from physical to online retailers undoubtedly has hurt brick-and-mortar retailers, but physical retailers are facing a host of other challenges that are forcing a fundamental reckoning.”

He notes that e-commerce itself is nearly not responsible for all of the problems befalling the nation’s malls and shopping centers. “Online sales still account for only 10% of non-auto retail sales, rising to 20% or more if the retail categories that typically are not sold online are excluded, such as groceries, home improvement, small convenience items and prepared foods.

“Physical retail will still have to find ways to counter e-commerce’s convenience argument, and the change in tax collection obligations is unlikely to alter that fact,” Holderness says.
Challenges In Both Camps

It should be noted that this decision will move forward into the online retail world ease. E-commerce vendors will have to figure out how to handle the byzantine system of sales and local taxes, although many have anticipated this ruling and gotten a jump on this issue. “How it is implemented will be important and will be subject to much debate especially as the tax relates to companies doing business across and within every state,” says James M. Rishwain, Jr. Partner of Pillsbury Winthrop Shaw Pittman LLP.

Meanwhile retail, for all the challenges it is still facing, can expect easier times — although not necessarily because of the ruling.

“There’s reason to believe that some of the worst pain is behind us as industry players adapt to the new market and consumer realities,” says Collier’s Nelson. “But that doesn’t mean retailers can now rest. Hardly. Retail sales will not swing strongly back to physical retailers just because sales taxes will now be universal online.”


29051 S. Western Avenue, Rancho Palos Verdes, CA

Centers Business Management (CBM) leasing agent, Jason Ehrenpreis, recently completed a lease transaction representing the landlord and tenant, Pie Rise, a gourmet pizza restaurant, on a 4,650 SQFT freestanding retail building. The property, formerly a Marie Callender’s, is at the intersection of Western Avenue and Trudie Drive in prime Rancho Palos Verdes. Immediately adjacent to the site is a Broiler Express drive-thru location and a Denny’s restaurant. Across the street is a Ralph’s anchored community shopping center with a Carl’s Jr drive-thru on the hard corner.


Congratulations once again to CBM’s 2017 CoStar Power Broker Award winners!

Dave O’Connell, Jason Ehrenpreis, and David Levcovitch were formally awarded their 2017 Power Broker plaques at a ceremony this past Thursday.

The event was held at CoStar’s fiftieth floor offices at the 777 Figueroa Street building (adjacent to the 7th+Fig shopping center) in the heart of downtown Los Angeles.

A grand time was had by all on hand, set against the stunning backdrop of panoramic LA skyline views.

 


24372 Vanowen Street, West Hills, CA

Centers Business Management (CBM) leasing agent, David Levcovitch, recently completed a lease transaction representing the landlord and tenant, a local martial arts studio, on 2,800 SQFT retail space. The corner strip center is at the intersection of Vanowen + Valley Circle in prime West Hills. A newer, well-maintained, 2-story property, the center is home to Allstate, Farmers, and State Farm insurance agencies, in addition to a diverse mix of service-oriented tenants.


1453 N. Azusa Avenue, Covina, CA

Centers Business Management (CBM) Valley Division Director, Dave O’Connell, recently completed a lease transaction representing the landlord and tenant, Boost Mobile, on 1,576 SQFT retail space. The unit is in a sprawling community shopping center at the intersection of Foothill and Mountain in prime Upland. In addition to Ross Dress for Less, the center’s A+ regional co-tenants include El Super (Hispanic grocery store), Fashion Q (clothing outlet), Western Dental + Orthodontics, and El Polo Loco. Additionally, the center is immediately adjacent to a Walmart anchored shopping center that also hosts Fallas Paredes (Hispanic discount clothing retailer). And is across the street from a Lowe’s hardware anchored center, also home to County Buffet, Subway and more.


Net-Lease Rides Wave of Retail’s True Fundamentals

By Globe St. May 31, 2018

”Retail sales will continue to grow this year as discretionary income ascends.” So Marcus & Millichap kicks off its First Half 2018 Net-Leased Retail Research Report.

Recently named national director of retail Scott Holmes points to a two-fold driver of this good news. First, “The tax law changes and the general health of the economy are creating more discretionary income for many purposes, including investments,” he tells GlobeSt.com.

Holmes also points to a release of last-year’s pent-up demand on the part of investors waiting to see where the then-proposed tax reform would lead. “There was a lot of fence-sitting last year,” he says, “which has turned into increased volume.”

Interestingly, much of that volume is coming from apartment investors, seeking higher returns and lower management responsibilities. “We’re seeing some apartment investors selling that product type at historically low cap rates and moving that money into less management-intensive products, such as single tenant, net-lease retail,” he observes, “and they’re doing so generally at a higher cap rates than apartments.” (Cap rate spreads remain at such historically high levels, the report notes, that they may temper any adverse impact from Federal Reserve rate increases.)

The result of these myriad tailwinds are evident. “This year,” the report states, “retail spending is forecast to post a 4.5% advance, buoyed by the continued acceleration of e-commerce growth. Although online stores consistently expand their footprint, the e-commerce sector is just a small part of a much larger retail setting.”

Among the net-lease retail sectors, “Dollar stores continue to perform well due to their inexpensive convenience items crafted to serve low-income households,” according to the report. “Grocery stores remain a highly sought-after asset as well, which can be largely attributed to the continued improvement of the overall experience. Dine-in options, wine and cheese bars, and more quality products keep foot traffic high and occupancy strong for owners of these assets. Necessity-based stores, like grocers, have proved to be relatively resistant to the rise of e-commerce.”

Tracking the development side of the net lease picture, Marcus & Millichap reports a contracting pipeline. “As the retail marketplace has improved throughout the cycle,” says the report, “builders have largely responded by supplying build-to-suit product for net-leased tenants. As a result, single-tenant structures have routinely made up more than two-thirds of annual deliveries since the recovery began in 2009.

“Despite rising inventory availability due to several high-profile closings,” the report continues, “net absorption has remained positive, generating robust growth in the average asking rent, which rose above 2008 levels for the first time in 2017. Elevated development costs that could be bolstered by the new metal tariffs may trigger further upside in asking rents as tenants vie for the limited space coming online.”

Even interest rates, for the time being at least, are fueling volume. The interest-rate question was the biggest issue after the wait-and-see Holmes indicated previously. “We had a pretty rapid rise in the 10-year Treasury last year,” he says. “It seems to have settled down to the new normal, and for that reason as well more people are transacting. There has been a modest rise, but it always depends on the market and the product type, especially in retail.”

In fact, he adds, high-credit, long-term net lease transactions have in general been less impacted than other types of retail, such as power centers. But it’s really “a case-by-case question,” he says.

As both the report and Holmes point out, the fundamentals of the market–and the resultant investor interest–belie the headlines of doom-and-gloom. In fact, despite said headlines, there were more store openings (4,000 in all, according to Marcus & Millichap) than closings last year.

In all, Holmes sees a strong market for the foreseeable future, with only one bit of advice. “Certainly, the refrain for quite a while now has been cautious optimism,” he says. “There have been some headlines, but as you go through the fundamentals on a broad national basis, conditions, especially earnings, still very much lean to the positive. Despite the headlines, vacancies are near all-time lows, there’s rental rate growth and supply is constrained.”

Which leads us to the advice, directly tied to the essentially local nature of the retail market: “Do your homework on the market,” he concludes.