Expert insights: In retail market, second-generation space the answer to a more cautious approach

Commercial real estate experts offer their insights heading into the second half of the year.


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  • | 12:00 a.m. July 14, 2023
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Christian Oldenburg
Christian Oldenburg
  • Real Estate
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If you have paid attention to retail real estate recently, you may have noticed that old retail is the “new” new retail. 

Demand for second generation – industry jargon for previously occupied  – restaurant spaces has been overwhelming post-COVID. 

Even large box retailers like HomeGoods, Burlington, Nordstrom Rack and Rooms To Go have been pursuing second generation space. 

To understand why this is happening, it’s important to consider the retail development pipeline. 

During the last cycle, retail developers got ahead of themselves, building excess square footage to keep up with permits for housing that would never be occupied or even delivered. 

This cycle has been vastly different. While industrial and multifamily have garnered all the headlines, attracted most of the capital and built the most impressive development pipelines, retail developers have remained conservative. 

Consider the following statistics:

In the years leading up to the financial crisis, the retail development pipeline in Northeast Florida was equal to 2.3% of total retail inventory. Following the crisis, that figure dropped to about 0.4% and remained there until 2016. 

Since then, the pipeline has averaged about 1.3% of inventory, well below what we saw before the crisis despite robust population growth and strong employment and income growth trends. 

Why? There are a lot of reasons. 

The availability of suitable sites is becoming a factor inside the Interstate 295 beltway. Retailers are being more cautious given the growth of e-commerce sales. And capital for retail development is scarcer today than it was before. 

All these considerations restrict development, but the biggest factor is cost. 

The cost of land, materials and labor have soared to levels that simply cannot be supported by higher retail rents except in areas where retailers can comfortably project fantastic sales. 

So rather than hobble growth plans, retailers have elected to be creative and pour capital into second generation spaces when possible. This is especially true of retailers who compete largely on price, as they have more trouble absorbing high fixed costs.  

So, keep an eye on those vacant retail spaces. Something new is likely coming soon.   

Christian Oldenburg is president-elect of the NAIOP Commercial Real Estate Development Association Northeast Florida Chapter.

 

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