Retail Real Estate Trend: Non-Traditional Tenants Go A-List

Web-Proof Services Are Attracting Landlord Interest as Some Retailers Falter

Last month I served on a panel at ICSC’s PA/NJ/DE Conference and Dealmaking event in Atlantic City. My group’s discussion focused on non-traditional tenants and their growing popularity in commercial retail leasing. On the four-person panel, I was the sole spokesman for the landlord side, with the rest of the members representing non-traditional tenants who lease space (or want to lease) in shopping centers. As might be expected, they were all attracted by the visibility, convenience and traffic a popular shopping center offers. They want to be where the customers are. No surprise there.

At Levin, we have many non-traditional tenants under lease – fitness centers, health services, day care providers, gaming centers, and, of course, restaurants. Not long ago, like most managers in the business of commercial retail leasing, we were reluctant to go with tenants other than more traditional retailers. That’s changed big time. I’d like to tell you why non-traditionals are now on our A-list.

Behind the Trend #1: Non-Traditional Tenants Are Amazon-Proof
While many retailers are struggling against branded online stores and behemoths like Amazon, service businesses face no web-based competition at all. WebMD can’t stitch up a cut. YouTube videos are no substitute for a Nautilus circuit or Spin class. You can’t leave your toddler with babytv.com while you work. You get the point. Services and experiences can’t be provided by the Internet (at least not yet). We in commercial retail leasing like that. We’re looking for tenants that are fiscally solid and likely to stay that way.

Behind the Trend #2: Service Businesses Drive Traffic
In our era of the time-starved lifestyle, people look to consolidate as many of their errands and activities as possible. A shopping center that offers the opportunity to combine a fitness session with grocery shopping and a prescription refill will draw traffic, benefitting multiple tenants and attracting new ones. Our grocery tenants, for example, report a substantial flow of customers from their fitness center neighbors. That’s a win-win-win for the tenants, landlord and shoppers.

Behind the Trend #3: Long Leases and Solid Financials
Non-traditional tenants typically seek longer leases, often because of the higher construction costs due to the more extensive build-outs they initially require. They also tend to be stronger financially and have better credit than many of today’s retailers. Both these qualities make them a highly desirable addition to the tenant mix.

Non-Traditionals Do Pose Some Challenges in Retail Leasing
Since nothing’s perfect, we have to consider the challenges that these businesses – appealing as they are – present. The most common is parking. A fitness center user, for example, may tie up two hours of parking space per visit. We’re always very careful to assure that there’s adequate parking before any new lease is signed. Another roadblock may be image. Some specialized medical centers, for example, can seem out of place among the existing mix of restaurants, boutiques and entertainment providers. We’re sensitive about overall image and have declined some prospective tenants that weren’t a good “fit.”

At Levin-Managed Properties Non-Traditionals Are Here to Stay
Our portfolio has many fitness centers, which are now considered mainstream uses in today’s shopping centers. Levin-managed properties are home to most of the major national brands, including Blink, Crunch, LA Fitness, Leisure, Snap and Planet Fitness.

More health services are coming on board with us. We just signed a lease for 2,500 square feet at our Mayfair Shopping Center (Commack, NY) with GoHealth, a walk-in clinic. This medical services model is growing rapidly, with a third of the new establishments situated in shopping centers. We expect to see more of them as Levin tenants in the near future. Physical therapy services are interested in shopping center space, too. A Kessler rehab is located in our Aldrich Plaza (Howell, NJ).

Daycare (Apple Hill Academy and C2 Education Center), postal services and even a vet, along with restaurants and the popular gaming chain Dave & Buster’s evidence Levin’s interest in cultivating this new segment in commercial retail leasing. Non-traditional tenants meet the needs of today’s consumers – and even boost business for our traditional retailers. A combination that works quite well

Investors in Retail Real Estate Are Seeking Expert Advice

By Joseph Lowry, SVP-Leasing and Acquisitions

Levin Expands Its Third-Party Services to Meet Growing Demand
A paradigm shift is underway in retail and in the retail real estate industry. One result is a surge in the demand for third-party services. In the last 28 months, our investment advisory practice took on over 21 new retail leasing and management assignments. We’re cheered by the strong economic momentum both nationally and regionally, but the flip side is that negotiations are getting tougher as investors look for that illusive ironclad deal. It’s a climate in which investors need guidance from leaders in commercial retail real estate. Here are some of our observations on the current state of this dynamic market, plus a quick look at how we’re assisting our investor clients.

Game Changers for Tenants: Online, Mergers and New Competitors
First, let’s look at the tenant side of retail real estate today. The evolution of online shopping undeniably has spurred changes for bricks-and-mortar stores. Merger activity is creating growth in scale for some retailers, but at the same time, consolidation is closing many locations. Preferred anchor categories, like supermarkets, are feeling the heat as discount and high-end grocers challenge their mid-level counterparts and drug, dollar and big-box department stores incorporate food into their inventory. Investors looking for shopping centers need to focus on the quality of every property they consider.

Top-Quality Retail Investment Property is a Scarce Commodity Today
Flight to quality is the hallmark of today’s commercial real estate market. Hundreds of millions of dollars in capital are chasing a limited supply of core institutional-grade properties. As a result, we’re working on more and more deals involving value-add or core-plus properties. And we’re finding that more buyers are willing to look at these asset classes than previously.

Six Factors That Must Be Analyzed Before Investing in a Commercial Property
Whether a property is institutional grade, value-add or core-plus, whether it’s broker-listed or an off-market deal, certain key factors need expert evaluation. These include an analysis of capital requirements, operating statements, rent rolls, debt levels, the condition of the property, and the state of the local market. Savvy investors are relying more and more on third-party providers who can bring a granular level of knowledge to the assessment process.

Retail real estate companies, like Levin, that maintain full in-house capabilities in leasing, accounting, property management, construction management and marketing are best positioned to assist investors in evaluating properties. Our years of hands-on experience in construction management is especially valuable in identifying physical conditions that represent future risk. Our regional focus is also of significant worth, providing strong brokerage connections and up-to-the-minute awareness of both listed – and unlisted – retail real estate investment opportunities.

Levin’s Support Extends Beyond Closing
After closing, many of our clients turn to us to develop and execute a successful operational strategy, assuring maximized property value throughout the entire investment cycle. In fact, a number of the assignments we’ve won in the past two years involve recently traded properties – for both new and repeat clients. These organizations look to us to establish, maintain and improve competitive positioning for their assets.

Today’s commercial retail real estate market holds tremendous opportunities for well-informed investors. Levin’s decades-long experience, encompassing every facet of the industry, makes us a valuable partner throughout the transaction phase and beyond.