Commercial real estate is no stranger to economic and societal disruptions—in fact, that’s what makes the industry so vibrant. For the retail sector, disruptions have been coming in waves. So where will the gusts of change blow this asset class to next?
Last week, five CRE professionals convened online to tackle that very subject during the 19th annual Commercial Real Estate Forecast Conference. Keith Lord, president at The Lord Companies moderated the discussion that covered topics as varied as groceries, cannabis and landlord/tenant relations.
Deena Zimmerman, vice president and national retail council co-chair at SVN Chicago Commercial, responded to a comment that Lord made regarding the “normalcy” that retail can reattain.
“I agree, ‘normal’ is almost offensive; I don’t want things to go back to normal,” Zimmerman said. “Retail is not dying, it’s pivoting, and the pandemic has had very little to do with this.”
She pointed out that many brick-and-mortar retailers were already struggling prior to the pandemic and COVID-19, unfortunately, simply provided the final burden that forced them out of business. She sees an upside, however, such as the resurgence of startups and a vivified entrepreneurialism. Salons facing draconian occupancy limits, for example, are opening smaller offshoots in nontraditional locales. Larger spaces have started leasing out to ghost kitchens—food and beverage businesses that serve only pickup and/or delivery customers.
Consumers’ dining habits changed during the pandemic with year-over-year grocery sales increasing by approximately 20 percent in 2020. But as Sarah Wicker, vice president of research at CallisonRTKL, pointed out, only 10 percent of those sales were deliveries. Individuals are still shopping in person for their food by a wide margin, which highlights the growing importance of grocery-anchored retail centers.
“We are seeing more retailers that were only open in urban centers going out to grocery-anchored centers,” said Wicker. “I think these centers are going to continue to elevate what the ‘experience’ is.”
Experiential retail had been buoying the sector pre-pandemic, but few would categorize grocery shopping as experiential. However, the magnetism that these assets have and the foot traffic they command are forcing more people to reconsider what uses can go into a shopping center anchored by a grocery store.
More and more, consumers are demanding 15-minute cities, the concept of having virtually every conceivable retail offering within a 15-minute walk from their homes. Grocery stores can be the nexus around which this idea can flourish, and Wicker reported that her developer and retail clients have become more flexible about what form strip centers can take and what services they can provide.
David Strusiner, vice president of leasing at Craig/Steven Development Corporation, dove into what lease negotiations look like from the landlord side. While every space has a floor below which rents are untenable, he is open to offering certain concessions if they will help to close a transaction.
“When someone like Deena comes to beat me up about rents, we have a happy button, a price point that we aren’t going to go below to make the deal,” Strusiner said. “But we are restructuring base rent levels to entice people to come. There are lots of ways to skin the cat, free rent, TI, whatever.”
On the tenant said, Zimmerman said she is currently seeing the types of deals that are reminiscent of what was commonplace a decade ago. Virtually every lease she facilitates is a 10-year deal structured to be very tenant-friendly for the first year or two. This could mean, perhaps, flat rent for the first year. At the end of the term, however, the landlord should be made whole.
There are a number of hot sectors in addition to groceries. Mike Demetriou, president at Baum Realty Group, pointed out the rising profile of anything related to pets, from veterinary services to pet supply stores to boarding facilities. But the sector with the most growth potential—still fairly new in Illinois—is recreational marijuana.
“It’s not a silver lining. There are not enough people that can participate in it to call it that,” Demetriou said. “But as it becomes normalized, the cannabis economy can be silver lining for lots of industries. From a macro perspective, going from $0 to $1 billion revenue is going to change views.”
Demetriou pointed out that dispensaries can and will be located in virtually any tier of retail space. For example, before the Lightfoot administration restricted where cannabis dispensaries can be located in the Chicago city limits, Baum Realty was looking at locations all up and down the Magnificent Mile. In his view, an Apple store model is just as viable as an isolated footprint forced into an industrial-zone-adjacent parcel.
Zimmerman agreed. “You hear these announcements of Gap and Macy’s leaving Michigan Avenue,” she said. “Who better to backfill those spaces? I think we will see a beautiful renaissance for cannabis very soon.”