Following a period of cautious optimism about the retail market, real estate professionals are now bullish on new opportunities, with demand expecting to grow faster than supply. This shift in sentiment is largely driven by limited new development of retail space over the last decade, paired with growing retailers’ interest in expanding their physical footprint, ultimately increasing competition for space and rent costs. Residential-serving retail development will become a priority in the coming years, as remote and hybrid work models drive demand for neighborhood-centric retail options such as grocery and convenience stores. Jonathan Lorenzen, Partner at Allen Matkins, and Deke Hunter, President of Hunter Properties, Inc., share their thoughts on the factors that will help drive retail’s resurgence as part of the Winter 2024 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

Leases Should Be Focused on Long-Term Success

In a strengthening market, landlords will need certain requirements in leases to own and operate the shopping centers for the long run. “Getting more in rent today doesn't do me any good if I can't pass through the right amount of operating expenses to operate the shopping centers successfully,” says Deke Hunter.  “We focus from a landlord's perspective on broader lease rights more so than just on more rent. It's more on improving our flexibility to be a long-term owner.”

According to Jonathan Lorenzen, there is now more of an emphasis on the percentage rent as opposed to purely a base rent structure. While this can appear to put more of the risk on the landlord because there's not necessarily a guaranteed base rental stream, it also puts more of the reward evenly into both the landlord and the tenant side of the deal. If the tenant is successful, the landlord will see the upside of that with an increased percentage of the gross sales.

Tenants and Investors: Two Sides of the Same Coin

Hunter is seeing a broader demand on the tenant side. As retailers are growing physically back into the marketplace, they are redefining how they attract customers, whether it’s a traditional large parking lot with a growing sign, or a location in a mixed use downtown environment. While tenants may desire to be downtown, if they can't park, deliver, or receive deliveries, that impacts their business. As tenants look at coming back, developers need to address those requirements and position them to attract a broader customer base.

According to Lorenzen, “New retail development projects will largely be influenced by the end customer, with spaces designed to maintain consistent foot traffic and, in turn, drive tenant demand. Whether it’s an urban storefront or a suburban neighborhood shopping center, developers must closely consider how a project’s location and amenities will support a convenient shopper experience that drives repeat business.” 

Investor demand is growing too, thanks to the shopping centers that offer everyday services – grocery, drug, etc. – while at the same time differentiating themselves with the entertainment component or with a component that leans heavily on soft goods.

A New Twist in Mixed-Use Development

As retailers have moved into more vibrant downtown mixed-use development, there has been a big change in the developers’ focus. They now look to start at the pedestrian plane and develop for the needs of the retailer first. Once they get the right retailer on the ground floor, and accommodate their requirements, they have found they can flex the office and residential space above.

The Main Attractions

Owners of the traditional power centers with accessible big box stores and fast food franchises are still seeing a lot of growth, Hunter points out, because people are looking for deals due to rising interest rates. Another area of interest is growth in historic areas. The buildings in so-called old towns of areas where people live, away from downtowns, are attracting a lot of development money and they're being repurposed for some really interesting uses.