Bottom’s Up: Navigating the ever-evolving New Jersey retail market
By Jason Pierson, [email protected]
The effects of the economic downturn were highly visible in the retail real estate sector, particularly within New Jersey’s prominent retail corridors. As vacancy and going-out-of-business signs expanded, we saw a combination of big-name retailers declaring bankruptcy and mom-and-pop stores struggling or closing their doors altogether. However, now that the market has shown signs of bottoming out, retailers are rising from the ashes and finding new opportunities with activity trending upward in this mature New Jersey retail market. We’re now seeing incremental rental increases in some markets as well as competition amongst retailers for space; and the changing landscape has concurrently brought about an evolving deal structure. As the economic recovery continues, retailers will be able to use increased capital to expand their operations and capture more space or upgrade existing locations with relocations and consolidations.
After the market crashed, there was an immediate sea change in landlord expectations and tenant desires, which resulted in a tremendous gap in bid/ask rates (in addition to the lack of available credit). This hesitation stalled shopping center leasing, created significant vacancies and, ultimately, led to decreased shopping center values. Property sales slowed down and some owners sat with large vacancies, losing money month after month. Landlords didn’t let go of their great expectations because of the rental rates they had previously been receiving, but after a year or two of losing rent, it became apparent that something needed to be done. Landlords and retailers alike realized that creativity was the key to staying competitive, and as a result we’ve seen landlords start offering concessions, such as free rent periods as well as the sub-division of larger spaces to accommodate smaller tenants for both long-and short-term leases and non-traditional tenants such as “pop-up retail” opportunities.
While New Jersey has recently experienced an increase in deal activity and certain shopping centers have begun to increase rates, rental rates still remain 20% to 25% lower than what they were a few years ago. This shift has created an increase in demand, as well as competition for well-located spaces in high-volume retail corridors. As a result of the economic downturn, many stabilized retailers have had to consolidate and/or downsize their current footprints, resulting in a hunt for more efficient locations. From the landlord’s and broker’s perspective, the better the tenant, the better chance there is of securing the deal.
New Jersey still remains one of the most attractive markets for local, regional and national retailers, despite the higher taxes and rental rates. It is the most densely populated and second-wealthiest state in the country, and those income and density levels speak volumes as to why it remains so competitive. Much of that competition is being fueled by food, discount/value and convenience users, which are all consumer-driven. Several new names have entered the New Jersey market, including Qdoba Mexican Grill, Top Tomato, Batteries Plus, Muscle Maker Grill and Hand & Stone Massage Spa, all of which are making aggressive pushes into the state, while entrenched names like 7-Eleven, Trader Joe’s, Dollar Tree and Buy Buy Baby are still actively growing and taking advantage of sites that priced them out of the market a few years ago. New Jersey towns are getting more aggressive about marketing and accommodating retailers, but it is still very hard for restaurant and drive-thru users to obtain municipal and governmental approvals, so instead we are seeing them establish themselves in second- and third-generation spaces. Additionally, according to recent research reports, national retailers who had been sitting on cash allocations for expansion have received directives from stockholders and currently have renewed goals on how many stores they need to open in the near future, with more firms looking to expand in New Jersey over the short-term.
One trend we have seen since the economic downturn in late 2008 is landlords providing aggressive shorter-term, five-to-seven year deals that have stimulated economic growth across New Jersey. Once those leases start rolling, it’s likely we’ll see larger rental rate increases, which should result in greater shopping center sales as cap rates begin to decline due to improved shopping center revenues and speculative hope for increased lending, followed by active development. But don’t expect to see many centers built on spec as developers have learned that lesson the hard way. They will only sign off on a project if it makes absolute sense and is a prime property with a large respectable anchor secured.
After assessing the downswing market status a few years ago, it became clear that retailers, landlords and brokers need to start looking at available spaces from a different perspective and explore how properties could be divided to attract new tenants. Some savvy landlords heeded this advice, made necessary upgrades to their properties and got creative with deals.
Owners and brokers must continue this level of creativity and remain flexible in the deal process even as the economic situation improves. One of the better repercussions of this economic downturn is that it served as a wake-up call for property owners, developers, retailers and brokers. Many learned that the waiting game doesn’t work and even when there’s a downturn, there’s always an opportunity to be had for everyone if they re-think, re-tool and re-adjust their expectations.
Today’s local retailers are poised to become the future regional retailers, and the regional retailers are in line to become the next national retailers. New names come in and replace the old. The bottom line is that, like most real estate sectors, retail is always evolving; all of us playing the game simply need to adapt to the changing faces and spaces in order to remain competitive and successful in this marketplace.
Jason Pierson is a member of the retail brokerage services group based out of CB Richard Ellis’ East Brunswick, N.J., office. Pierson is a leading advisor/representative to several national retailers and property owners with their real estate requirements throughout New Jersey including Burger King, AT&T Mobility, Sovereign Bank, Qdoba Mexican Grill Denny’s Restaurants, Chelsea Premium Outlets, Daibes Enterprises, Washington Square Group, Renaissance Properties and Benbrooke Realty Investment Co. He can be reached at [email protected].