Retail real estate regaining health

March 5, 2011
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The local retail real estate market healed a bit last year following a recession that came close to putting it on life support. The vacancy rate dropped from 12.6 percent in 2009 to 11.5 percent in 2010, according to commercial real estate firm Colliers International of West Michigan.

“I think last year was a healing year. We saw a lot more interest in the market than the year before. We saw an increase in confidence in the retail market and more people willing to look at expanding. Part of that expansion desire was because of pricing opportunities for sites, and part of it was because of confidence in the market,” said Bill Bussey, a retail specialist and a principal with Colliers International/WM.

The pricing opportunities Bussey referred to mean that the cost to buy and lease was right for retailers last year. Prices began to fall when the Great Recession started creeping into the market in late 2007, and the decline accelerated once Wall Street crumbled the next year. Empty storefronts and vacant mall spaces dotted the market.

Leasing activity, though, was higher last year from the previous year, with 120 leases being closed in 2010, up by 17 from 2009. The average amount of space leased also grew last year to 3,557 square feet, from 2,250 feet during the previous year. Sales were also up: 525,000 square feet sold for over $19 million in 2010 while a year earlier, about 200,000 square feet changed hands for roughly $12 million.

“If you’re a tenant, you can now negotiate a lot better deal than you could three years ago. If you’re looking to buy a site, there are a huge variety of things available. And unless you want to go to the absolute corner of Main and Main, there still are very attractive opportunities available,” said Bussey.

“The market is firming up partially because of the increased activity but also because the people who have already taken advantage of prices are starting to absorb the vacancies that are out there.”

Bussey felt the trend would continue this year. He said he has been pleasantly surprised by the number of inquiries his firm has received so far this year about leasing and buying retail space. He said many of the calls he has taken are coming from smaller retailers, rather than national and regional merchants.

“We had a showing the other day in Grand Rapids for a small retailer in Kalamazoo that wants to expand into Grand Rapids. So it’s a very positive sign. The thing we’re cautious about is the recovery is fragile,” said Bussey, who added that overspending by the federal government and rising inflation could cancel the recovery.

But the recession hasn’t only affected property prices and the real estate market. It also has had a big hand in changing the retail landscape, which has turned into an absolute gold mine for one segment of the industry. For the first time in recent memory, a value retailer is leading the growth parade.

The Dollar General Corp., a public firm, said in January it will open 625 stores this year and remodel or relocate another 550 existing stores. In all, Dollar General said it would create more than 6,000 new jobs through its expansion. Before its announcement, the company had over 9,200 stores in 35 states.

Bussey said the growth of all value retailers, the industry’s name for all dollar-type stores, reflects the impact that jobs losses and the recession have had on consumers.

“If you look at what is happening in our country, the savings rate has doubled over the last several years compared to incomes. So people are salting away money, and that is a trend that is not going to quickly change. That means people are becoming more fiscally conservative. I think it is indicating a change in shopping patterns,” he said.

“But like anything, as employment increases and as confidence in the market increases, people will be more likely to want to buy a little bit better stuff or maybe buy that thing that they didn’t think they could afford before. But I think you’re going to find that the fiscal conservativeness will be a part of people’s thinking for a long time, and I think that’s good.”

Another recent transformation in the industry is that big box companies, namely Target and Wal-Mart, plan to build smaller 20,000-square-foot boxes in more urban settings like downtowns. So far, these stores are only being planned for the nation’s largest cities such as Chicago and Boston, even though locations in those urban areas are difficult to find and very costly. Is there a chance one could be built here?

“There is so much vacant land in Grand Rapids, all across the city, that I think it’s unlikely that we will see a smaller, urban store anytime soon. That doesn’t mean that we won’t see one,” said Bussey. “But I think that the economy has to get a lot better and spending has to be a lot looser for any of the big boxes to be able to justify a smaller, urban store here.”

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