By Jared Sullivan, The Lerner Co.
The retail commercial real estate industry has been an interesting world to observe over the last several years, to say the least. From the repurposing of massive retail boxes and malls following the fall of Gordmans, Sports Authority, Sears and others, to the unpredictable global environment we have been experiencing over the last 12 months due to COVID-19.
One thing that’s certain is the ability to quickly adapt within the retail world is a critical element to remain relevant as the mold of consumers’ needs continues to evolve.
Jared Sullivan, The Lerner Co.
Fortunately for the Omaha and Lincoln retail markets, the downturn for businesses and consumers alike has been significantly less than the more densely populated cities and suburbs of New York and California.
Nevertheless, the impact of government shutdowns and restrictions throughout 2020 has handicapped more businesses and landlords than we ever expected. As we emerge from this storm, we must ask ourselves “What will the retail landscape look like moving forward?”
Here to stay
One outcome of 2020 we anticipate seeing as a gold standard moving forward has been the implementation of curbside carryout and mobile order pickup services. While the concept of these services is nothing new, the consumer’s growing demand for convenience has caused businesses across the board to step back and reconsider their models.
For instance, when most restaurants were forced to close their doors to in-house seating in March of 2020, the only way to keep food “on the table” was through carryout dining.
A byproduct of this trend we’re noticing on a national scale is with Chipotle Mexican Grill, a brand that would never be considered as “fast food,” began incorporating drive-thru windows (coining the phrase “Chipotlane”) in 2019. Since then, the requirement for a Chipotlane has become an absolute must for nearly all new stores in development.
Another example of this retail adaptation can be seen in an Omaha-based coffee company and its growth throughout the 2020 calendar year. While the kiosk-based coffee concept has primarily grown through its drive-thru only model, we have witnessed the brand nearly eliminate the café concept from its new store plans entirely. On a related note, other national coffee brands that previously held the in-store café as a badge of honor are incorporating more and more drive-thru-only models into their development pipelines.
Although the pandemic has accelerated e-commerce shopping trends, the need for service-oriented retailers remains a driver for new deals and rollouts in Midwestern markets. Discount retailers like Dollar Tree, Family Dollar and Dollar General and automotive tenants like AutoZone, Brakes Plus and Discount Tire are among those names expanding, in addition to Chase Bank and Veridian Credit Union continuing their pursuit of new locations throughout the Omaha and Lincoln markets.
Corporate names aside, the franchise-driven concept European Wax Center has also recently introduced its brand to the state with three Nebraska locations opening in 2021.
Another looming question from real estate professionals and investors is the environment’s impact on the retail investment market. Undoubtedly, the uncertainty over the last year has increased the demand for credit across the realm of triple-net-lease investments. Interest rates remain relatively low and investor desire for security while maintaining favorable returns has, in turn, increased pressure on cap rates across most retail properties, but specifically in single-tenant net leases.
An example of this can be seen through a recent project in a Des Moines suburb where a Starbucks traded at a 5.45 percent cap rate in 2018. Fast forward to 2021, the same developer in the same trade recently closed another Starbucks property, but approximately 30 basis points lower than the 2018 sale.
Market fundamentals
Some may want to ask the question, how did this last year fare regarding vacancy? For Omaha retail, the year ended with a 10.96 percent vacancy rate and over 31 million-plus square feet of gross leasable area, which was down 2.71 percent from the wake of previous years like 2010.
A range of new Omaha developments continues to come online led by Lockwood and Century Development’s project The Crossroads, a redevelopment of the former Crossroads Mall into a 55-acre mixed-use project with 200,000 square feet of retail space plus approximately 150,000 square feet of entertainment uses in addition to senior living, hospitality and multifamily components.
In Lincoln, principals of The Lerner Co. are developing a 55-acre development in Lincoln’s northernmost retail corridor called North Star Crossing, with plans to commence construction in 2021 and deliver sites by the first quarter of 2022.
So, after reflecting on the above, the question remains, what will the retail landscape look like as we move past 2020? Has the so-called retail doom and gloom in combination with COVID-19 forced this sector into a certain spiral?
It’s reasonable to make assumptions from either side of the aisle, but considering consumption makes up 70 percent of our country’s GDP, the optimist in me says we’ll continue to evolve with the times.
Opportunities will not look the same as they did before, but whether brands are downsizing/rightsizing or changing the model in its entirety, it’s important to keep in mind the cyclical nature of change in our world. Anticipation of the next shift is among the best ways to remain ahead of the pack.
Jared Sullivan is an associate broker with The Lerner Co. This article originally appeared in the April 2021 issue of Heartland Real Estate Business magazine.