Although the Tampa Bay economy may not have improved as much as everyone would like, the retail market is experiencing incredible activity. Many positive trends — redevelopment, new retailers, expansions, higher rents and, soon, new development — are driving the market upward:
• The retail vacancy rate was back down to 7 percent for the first time in almost five years, according to CoStar Group.
• Retail rents, which plunged between mid-2006 and mid-2012, finished the year at $13.69 per square foot and show signs of strength.
• The number of square feet of retail space delivered to the market hit its lowest level in the past five years, according to CoStar Group.
• Land is becoming scarce, especially in growing communities south of Tampa.
Considering these conditions, it looks as though it’s a landlord’s market again.
We can chalk this phenomenon up to the enthusiasm of restaurants, retailers and professional service firms demanding space due to a slight but steady rise in consumer confidence.
Hillsborough County collected $14.7 million on its local option sales tax in November, the latest month for which state figures are available as of this writing. That figure changed very little in 10 of the previous 12 months, but was up $1 million from the same month of 2012. The same pattern held in neighboring Pasco and Pinellas counties.
Fast and Fresh Rules
With the lack of new development, retailers are hard-pressed to find ideal spaces. For those unfamiliar with Tampa, there’s a food fight going on among chains such as Keke’s Breakfast Cafe, First Watch, Broken Egg, Toast Café and others that are open only for breakfast and lunch. Toast Café plans to add 50 stores across Florida in the next few years.
Consumers are passionate about eating healthier and quick-service restaurants are responding with diverse cuisines. These include PDQ, Little Greek, Tin Drum Asiacafé, FitLife Foods and Corner Bakery Café expanding in the Tampa Bay area.
The emphasis on fresh is also working for specialty grocery stores, which now consist of more than just Trader Joe’s and Whole Foods. Sprouts Farmers Market, Earth Fare, Lucky’s Market and others specialize in organic, locally sourced, healthy, non-genetically modified organism (or non-GMO) products.
Tenant Mix-Up
One of the biggest changes taking place is in the mix of tenants in shopping centers. Not too long ago, every store window displayed items for sale. Look through the glass now and you’re likely to see hair stylists, fitness trainers or doctors’ patients. Landlords are becoming more sophisticated, not just about what they charge, but who they select as tenants. Owners are making sure that each new tenant benefits the others. It’s almost as much about getting the right mix as bringing in the revenue.
The resistance among landlords and retailers alike to non-traditional tenants continues to lessen as they realize that while one family member is in a salon, gym or medical clinic, other family members will be shopping or dining that same day or next. Exposure is key to building traffic, and these service tenants are bringing potential consumers to their shopping centers.
Beyond the synergy, the new wave of tenants are filling space that some retailers view as undesirable. Salon suites, where an experienced stylist rents a suite to run their own business, will trade location for price, as long as the center offers spacious parking, easy access and is located nearby a concentration of existing hair salons.
The salon suite trend is gaining momentum with Sola Salons, Phenix Salons, Salon Lofts, Salons by JC and My Salon Suites all currently expanding in Florida.
Landlord’s Market
An upsurge in leasing activity is changing the dynamics in landlord-tenant lease negotiations and is spurring redevelopment. For the first time in several years, landlords are pushing up rents. Tenant improvements concessions are still part of the deal, but landlords don’t have to offer as much because well-located spaces are starting to attract more than one tenant eager to move into the center.
Redevelopment is accelerating with developers assembling parcels in established neighborhoods. That’s evident at Encore Commons in south Tampa. A developer tore down motels and a gas station to create retail pads and outparcels. With the market heating up, construction will inevitably follow.
Some projects, such as Tri-City Plaza in Largo, will arrive in mid-to-late 2015. When the project was built in the 1960s, it was a collection of five retail buildings, with some facing U.S.19 and others facing East Bay Road. Now, all but the Publix is being torn down so that all of Tri-City will face East Bay Road. The landlord also plans to add new anchor tenants and outparcels.
Redevelopment asking rents are trending 25 percent to 30 percent above what’s common for that market and will continue to trend up as tenants have fewer options. The high costs to redevelop properties are the driving factor behind these higher asking rents, but today’s economy supports the redevelopment trend with strong demand from tenants looking to enter markets with little availability.
Beware of Overbuilding
The recession brought construction to a halt, and lenders are only now underwriting new construction. The danger is that the enthusiasm for adding space will result in overbuilding, and a flood of inventory will hit the market just as we enter another downturn in the economy. We want to avoid a repeat of what happened in the mid-2000s — too many homes, stores and restaurants and the problems that inevitably follow. No doubt, a slow, steady pace of growth would benefit everyone.
— By Brian Bern, Senior Director of Retail at Franklin Street Real Estate Services. This article originally appeared in the April issue of Southeast Real Estate Business magazine.