In the world of real estate, the term “vacancy” gets a bad reputation, synonymous with lost revenue and potential stagnation. However, recent trends in the commercial real estate sector are challenging this notion. Recent trends suggest that commercial vacancies can actually be opportunities for growth and innovation. As we delve into the dynamics of the market, it becomes evident that strategic vacancy management is becoming increasingly integral. This helps foster higher rents and cultivate diverse tenant mixes.
Shifting Perspectives: From Vacancy to Opportunity
The year 2023 witnessed a remarkable resilience in U.S. marketplaces, defying recessionary predictions with robust consumer spending and a healthy job market. Retail and food services sales soared, particularly during the holiday season, translating into a significant uptick in base rents. According to the ICSC Marketplaces Industry Report: Q4-2023, base rents surged by 6.2% year over year, reaching $21.15 per sqft. This upward trajectory, a 3.8% increase over 2019 levels, underscored the underlying strength of the market.
Landlords seized upon this momentum by reimagining vacant big-box spaces into higher-paying uses and renegotiating leases with existing tenants at higher rates. Phillips Edison & Co., for instance, showcased this trend with a remarkable 25.2% increase in comparable-rent spreads for new leases in 2023. Additionally, the company saw a 17.9% increase across all leases, new and renewed. This further emphasized the appetite for strategic lease management.
Moreover, the positive trend extends across all regions in the U.S. is propelled by booming populations and limited new development. Despite the surge in base rents, the growth in percentage rent, tied to tenant sales, moderated slightly. This shift is attributed to a decline in new percentage rent leases. This is evidenced by mall owner Macerich’s transition from pandemic-era variable-rent agreements to fixed-rent ones.
Navigating Market Dynamics Amidst Retail Closures
Amidst these developments, one cannot overlook the impact of planned closures of major retailers like Macy’s, which affect significant portions of commercial mortgage-backed securities (CMBS) loans. However, the sentiment among landlords remains optimistic, with a focus on reclaiming large spaces and diversifying tenant mixes to mitigate potential risks.
In parallel, 2024 heralds a new wave of store plans from major retailers like Whole Foods, Nordstrom Rack, Ross Stores, Best Buy, and Target. These expansions underscore a strategic shift towards adapting to evolving consumer preferences and market dynamics.
Embracing Innovation: Online Integration and Beyond
Furthermore, initiatives like CBL’s Inventory Insider are revolutionizing the retail landscape, driving increased web traffic, and fostering a seamless shopping experience.
As we navigate through these transformative times, stakeholders in the real estate sector must embrace change. It’s time to leverage commercial vacancies as opportunities for innovation and growth. At Onward, we will assist you in navigating this dynamic landscape and realizing your real estate goals. Whether you’re seeking to optimize your property portfolio or explore new investment opportunities, we’re here to guide you every step of the way.
In conclusion, vacancies create new possibilities and redefine the future of commercial real estate. Together, let’s unlock the potential of commercial vacancies and chart a course towards a vibrant and prosperous real estate ecosystem.