City Grid real estate is a leader in Washington D.C. commercial real estate and marketing, representing building owners and tenants in hundreds of commercial real estate transactions.  Our principals have represented restaurants, landlords seeking restaurant tenants, and all manner of retail throughout the DC area.  As a real estate brokerage with a commercial-level marketing arm, City Grid DC uses the latest technology for the most advanced approach to marketing property for sale or for lease, but we understand that all marketing is local, and nothing can replace personal outreach and a relationship-driven approach to putting property in front of those in the market seeking space.

Our retail advisory services focus on landlord and tenant relationships, finding a long-term solution for retail occupancy that serves the building owner, the retail tenant, and the greater community with a longstanding retail occupant that best serves all parties with longevity and certainty, providing a continuous retail base that adds value to the remainder of the building.

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Real estate investors faced daunting challenges evaluating retail tenants even before the corona virus. The "retail apocalypse" didn't end retail, but did cause significant change in the retail industry and what type of retailers succeeded.  The so called apocalypse was in fact more of a shift in retail than its demise, and the advent of online purchasing simply changed what people needed, and how they got it.  In fact some studies showed that more retail opened during the height of this change (2018 and 2019) than closed, but news was often more focused on closures than openings and expansions.

 

Larger retailers have come under greater pressure in recent years, and the list of big box store closures is long and certainly well documented. And while urban areas have fared well, on average, rural areas have lost mall anchors and stand-alone retail boxes.  Those larger spaces will be very difficult to re-lease until a new type of use is identified, but urban areas have proven more nimble and able to pivot to alternate uses.   As leases expire, tenants will likely have more options to relocate as other large spaces come available and malls loose anchors.  The increased big box vacancy has put downward pressure on rental rates, but the reality is that the demise of malls has been more than a decade in the making, and the headlines are more of a reality in the suburban markets than in strong urban locations.

Investing in urban areas has not been without its challenges.

 

Lease term should always be a key consideration in any commercial real estate opportunity, but a prudent investor will assign added weight to this aspect of the deal when considering retail properties. Assuming a tenant is strong in all other aspects, a long lease term should offer some level of added comfort to any deal as the tenant remains contractually obligated to make rent payments even if the retail market were to further weaken.  Short term lease turnover should generate concerns, particularly if the local market is showing signs of weakness as re-tenanting vacant spaces could prove to be challenging.

 

A tenant’s credit should always be a primary consideration in any commercial real estate deal.  Credit ratings (if publicly traded) will likely be available for any outstanding debt of the parent company. Tenants which are more “mom and pop” in nature can be more difficult to evaluate from a credit perspective as company financials may not be available. In circumstances like this, an individual investor should not make assumptions regarding the financial strength of the tenant. This should be understood as a potential risk which needs to be taken into consideration within the context of the rest of the investment’s profile. There is also the middle ground circumstance in which you have a large private company which does not have public financials but holds a reputation as being successful.  Even if the parent company were to fall on hard times, strong store sales could make the subject location low on the list for store closures. In addition, should the in-place tenant vacate, a new tenant will be more likely to step in given the positive prior store sales which could indicate that the location itself is attractive.

 

Due to the seismic changes in the retail real estate markets and the changes in consumer expectations, the nature of a company’s business may be one of the biggest factors in the context of the retail apocalypse.  It is now clearer than ever that big box retailers are as vulnerable as the mom and pop stores when they fail to establish an online retail presence or react quickly to market forces. The retail real estate market is shifting towards tenants with products which are less common to purchase online or tenants which offer a consumer experience. Restaurants, medical facilities and entertainment venues have historically been more sheltered from this shifting landscape. Additionally, a retail center which includes a mix of experience and entertainment will encourage consumers to increase their time within the center which can benefit other retail tenants.  At the same time, digitally native brands are looking for growth in brick and mortar retail sites to enhance the customer experience and facilitate brand awareness and identity.

 

Individual investors need to take tenant considerations in the context of the bigger picture of the entire property and its local market influences. While retail has faced many challenges in recent years, not all markets have dealt with the same level of downward pressure. Local influences such as demographics, economic growth, population growth and adjacent property uses should also weigh heavily into any investment decision. Further, factors such as the asset’s quality, long term viability of the brands, traffic count, access, difficulty in replacing tenants and visibility are also highly relevant.

Ken Johnson

City Grid Real Estate

Copyright 2019 City Grid Real Estate, Washington , DC

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