Retail’s Rebound Continues

The Summer 2024 Survey panelists are optimistic overall about the future of retail space markets. Throughout the state, approximately half of the panelists have new projects planned for the next 12 months, and slightly less than half began new projects in the previous 12 months.

In Southern California, about 65% of panelists are forecasting that the demand for retail space will grow more than supply. They are also optimistic about the outlook for both rental and vacancy rates through 2027. In Northern California, the financing of retail development is expected to become more stringent. While vacancy rates are forecasted to be lower over the next few years, rental rates on average are not expected to keep up with inflation. 

Brian Michel, partner at Allen Matkins and Evan Kantor, head of Kennedy Wilson’s Commercial Investment Group share their thoughts on the factors that continue to help drive the rebound in the retail market as part of the Summer 2024 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

Class A is Popular

“The most popular transactions we’re seeing are for retail tenants, for luxury brands, anything entertainment focused, anything at mixed-use developments, especially new developments that are class A,” says Michel. However, in the past year there’s also been an increase in the volume of retail leasing transactions at strip malls with shopping centers, medical leases such as urgent care, and fast-food restaurants, with a steady stream of deals and no slowdown expected.

It's All About Flexibility

As retail tenants pivot to different trends, such as entertainment-focused or experience-based retail, there’s more limitation on prohibited uses that various tenants used to negotiate into their leases. According to Michel, “Pre-pandemic, there would be a laundry list of uses that other tenants in the shopping center couldn't engage in, but now much shorter lists of prohibited uses are giving tenants and landlords greater flexibility in their leasing and retail capabilities.” Also, according to Kantor, property owners and developers need to understand the retailer's demographic. “If they're family-oriented, they might utilize large parking facilities; for urban infill sites, you might want to create an environment with lots of walkability.”

Give Customers a Place to Hang Out AND Shop

According to Kantor, “The buzzword for retailers is creating an experience-driven type of format, a hub, something that would attract their customers to not only come to the store, but to stay much longer and shop.” Michel agrees: “People are trying to get out more, go somewhere else just to hang out with their friends. At a shopping center, any tenant's going to want to see common areas for people to hang out, and then enter their stores.”

It’s Not Just the About the Products Anymore

Following the resurgence of the asset class, we're seeing retailers take advantage of the inflection point between online shopping and physical real estate. They are utilizing technology, whether it's virtual reality or augmentation, to help continue to sell their product. “We're also seeing community hubs being created, where they are creating experiences in the space, whether it's a workshop or an event,” Kantor says. “The space is being used not only to display and show off a product, but really to create more and more experiences.”

Demand … from an Investor’s Standpoint

The demand for retail from an investor's standpoint tends to be necessity focused. “Post covid, we really saw a resurgence of grocery anchored or drugstore anchored retail, proving that it was essential,” says Kantor. “Investors tend to really like that type of investment.” Also, in order to preserve capital, it becomes a partnership between the landlord and the tenant, and flexibility will continue to be at the forefront.