Second life for retail space
August 5, 2013By J. Elias O'Neal
With the area’s retail market continuing to show signs of renewed interest and strength, a number of area brokers are taking note of the new leverage some landlords may have with their second-generation commercial property.
Grayson Powell, managing partner of Wilmington-based Coldwell Banker Commercial Sun Coast Partners, said as the region’s inventory of new retail space shrinks, potential retailers are looking at older shopping centers to suit their needs.
And as interest increases, some landlords of such commercial centers could soon gain the upper hand when it comes to negotiating lease transactions.
“Because the market is picking up, some [landlords] are reluctant to spend money because there is more competition for their space, so they can hold on to what they have,” Powell said.
Second-generation retail space refers to retail and office properties that are older than five years and have improvements that can be reused by another tenant, such as the University Commons Shopping Center on South College Road and the Ogden Shopping Center on Gordon Road.
Powell said prior to the Great Recession, second-generation retail space was filled by a number of retail and office users across the region. But as the economic downturn began to strengthen its grip on the area, a number of landlords suffered brutal losses – especially in older retail centers not owned by national firms.
He said the downturn made it difficult for landlords to renovate their aging centers and negotiate new lease terms to accommodate new tenants.
“During the downturn, tenants in second-generation space went under or moved to much nicer space like Mayfaire or the Landfall area because rates had dropped,” Powell said.
“Most landlords because of banking implications did not have access to cash renovate or upfit space and began asking the tenant to pitch in. But the tenant didn’t have funds to invest either, so there was real disconnect on how the deal could be put together.”
But now that may be changing.
CoStar Group – one of the largest real estate technology firms in the U.S. that also tracks commercial transactions throughout metro Wilmington – placed the region’s retail vacancy rate at 6.3 percent, according to the firm’s second quarter report.
That’s down from a 6.5 percent vacancy rate recorded during the first quarter.
Rental rates are also up region wide – increasing from $11.93 per square foot during the first quarter to $12.18 per square foot during the second quarter, according to CoStar data.
Powell said the improved economy was beginning to bring out potential tenants to a number of second-generation retail centers across the region – allowing some landlords to be choosy, and depending on their center’s occupancy, ask for higher rental rates.
“The centers are drawing in more tenants,” Powell said. “The banks are loosening up on lending to help make the deals work because the tenancy is up.”
Because there is not a flurry of redevelopment of second-generation retail space planned for the region, it may be too early to call the increase in tenancy at a number of the region’s retail centers a full comeback, said Hansen Matthews, partner and principal broker of Wilmington-based Maus, Warwick, Matthews & Company.
“There are still a number of third- and fourth-generation spaces that are vacant,” Matthews said. “This is still anything but a strong landlord market, but I’m pleased to see some of the landlords sailing into better waters.”