By Matthew K. Harding, Chief Executive Officer
Over the years we have heard many times about the imminent collapse of brick-and-mortar retail – early on due to the “apocalyptic” rise of the catalog industry, through market down-cycles and (perhaps most notably) the evolution of e-commerce. Yet time and again, strong product and strong tenants have endured. Flash forward through 18 months of pandemic-fueled challenges, and a tale of brick-and-mortar resilience is again unfolding as we enter the heart of 2021.
As is expected, some retail tenants are more active than others, with “essential” categories leading the way. For example, supermarkets are stronger than ever, with stepped up demand from grocery tenants, including new leases, relocations and expansions. Pharmacies and national off-price retailers are also taking advantage of current market opportunities. Fast-casual restaurant chains, which are welcome additions to any shopping center, have been another bright spot in the leasing landscape.
When it comes to making commitments, these tenants are confident, and transactions are coming together quickly. National brands and franchisees are making deals; they have come “off pause” and are capitalizing on current opportunities to lease exceptionally good real estate at a good price. We also are seeing movement among independently owned retailers. This includes new businesses launching; expanding a current operation; or moving to improve location, taking advantage of space availabilities that became available due to the pandemic. This activity is happening at a steady pace, fueled by current market conditions.
Activity at LMC’s leased and managed properties reflects this trend. During the first quarter, tenants signed nearly 275,000 square feet of new leases, renewals and extensions. This pace outperformed the same period last year – prior to the lockdown – and has continued at a steady trajectory. Additionally, our tenants are optimistic about performance potential this year. In our annual Outlook survey, more than two thirds (66.9%) of respondents expressed optimism for store performance in 2021. This compares to a trailing nine-year average of 68.1% expressing optimism for the coming year. This positivity is encouraging and also is supported by forecasts from organizations like the National Retail Federation, which anticipates retail sales growth between 6.5% and 8.2% this year.
Within this context, open-air shopping centers and strip malls remain a preferred destination, affording distinct advantages for tenants. Neighborhood, community, and power centers not only house traffic-driving categories like grocery and home improvement, but they also provide a higher level of operational flexibility and convenience than other product types. During business interruptions these centers also provided an environment where tenants could be more creative, allowing restaurants to increase outdoor seating, where possible, and setting up curbside pickup.
This product type also is ripe for investment activity. Grocery-anchored centers are among the most sought-after real estate categories; these well-located, well-tenanted properties are commanding low cap rates driven by low interest rates. Newly released research from CBRE affirms this trend: As the demand for net-lease properties inches back toward pre-pandemic levels, northern New Jersey remains a top 20 market for investors targeting the office and retail sectors.
Looking ahead, we expect the second half of the year will bring a continued illustration of brick-and-mortar staying power and agility. Shopping center owners, operators and tenants are moving forward, working through lingering uncertain circumstances and evolving within today’s ever-changing landscape. They are working together to better serve consumers by offering safe, convenient and efficient shopping experiences in a post-pandemic world.
