When Steve Warwick closed on a 46,000-square-foot lease in the Hanover Center with Hobby Lobby earlier this month, it signaled the beginning of the end - the end of available commercial space exceeding 20,000 square feet.

As leasing heats up this spring, some area commercial brokers are having a tough time finding existing retail space for junior box retailers looking to enter the market.

But while some are hoping the demand may trigger the need for new inventory, many don’t expect an onslaught of new retail development to occur anytime soon.

“The vacancy rate is getting smaller and we expect that trend to continue,” said Warwick, a managing partner and broker with Wilmington-based Maus Warwick Matthews & Company. “But that’s not what the banks see; what they see is that we still have space available and they won’t loan money to developers for any new capacity despite the need for additional junior box spaces.”

Leasing frenzy

After sitting in the doldrums for nearly four years, Wilmington’s commercial leasing activity came roaring back shortly after the clock struck 12 on January 1.

During the first quarter, which ended April 1, regional brokers leased more than 78,000 square feet of office and retail space throughout the greater Wilmington area — that’s up more than 57 percent from this time last quarter, according to the Commercial MLS data collected from the Realtors Commercial Alliance of Southeastern North Carolina.

Some of the most sizable leases last quarter include nearly 30,000 square feet to Lifepoint Church on College Road and 30,000 square feet in the University Centre shopping plaza to Ollie’s Bargain Outlet — a Harrisburg, Pa.-based retailer specializing in closeout, surplus and salvage merchandise that plans to open next month.

However, one of the longest holdouts in the region was 46,000 square feet of prime retail space at the Hanover Center shopping plaza on Oleander Drive.

Under contract for months, speculation wasn’t the only thing floating in and out of social circles — so were potential retailers, many of whom represent national chains.

“We did have several other junior box users interested in the space,” Warwick said.

The firm recently inked Oklahoma City-based Hobby Lobby to occupy the space — although the crafts store giant originally wanted more space.

“Hobby Lobby wanted 55,000 square feet,” Warwick said. “But they were able to make the store work in the smaller space.”

But with the Hanover Center space now occupied, it’s unclear whether Warwick’s other interested junior box tenants will find an immediate home in Wilmington.

“These are recognized, national retailers that like Wilmington, and want to be here,” Warwick said. “But to be frank, I don’t know where there is 55,000 square feet of existing space that is desirable for these types of tenants.”

He’s not alone.

Brokers at Wilmington-based Coldwell Banker Commercial Sun Coast Partners are also seeing a demand for junior and big box retail space.

Nicholas Silivanch, a broker with Team Silivanch and director of retail leasing and acquisitions for Coldwell Banker Commercial Sun Coast Partners said while its too early to call the shortage a trend, demand is growing for junior box retail parcels in the area.

“I’ve had to put a number of possible tenants, at least three or four, on hold,” Silivanch said. “We do not have the capacity on the ground right now, and what we do have is being leased very quickly.”

Silivanch and his team would know.

After announcing plans to lease a new 18,500-square-foot shopping plaza — Britton Center — in Monkey Junction, Team Silivanch was able to secure retailers for the center’s five units in five months during the shopping center’s construction. 

Retail space is also limited at University Centre, where Team Silivanch serves as the exclusive listing and leasing representative. Since the announcement of Ollie’s Bargain Outlet, the power center is now 97 percent occupied.

“Our space is limited,” Silivanch said. “If we had a space that was 45,000 square feet or larger, we could fill the space with our current demand.”

New options

What greater Wilmington lacks in capacity could be added in build-to-suit options.

Build-to-suit options are typically 100 percent financed by a developer to certain specifications set forth by a particular tenant. Over time the developer recoups those costs through rental rates per square foot.

“It’s a mutually beneficial formula,” Warwick said. “The big retailer is the draw and the smaller spaces feed off of the anchor tenant  . . . it’s a win-win for everyone.”

Despite occupying a former Lowe’s Food retail space, when Whole Foods signed on to more than 40,000 square feet in Oleander Place, Learning Express Toys and TCBY decided to join the tenant mix in the shopping center being redeveloped. A new national chain restaurant is also poised to build on an outparcel in the development. 

The same can also be said about Trader Joes, which plans to construct a 13,000-square-foot store, which recently closed on 1.54 acres of land near the intersection of Oleander Drive and College Road. 

Building to suit and redevelopment may also lessen risks to financial institutions, some still reeling from low rental rates and in some cases, chronic vacancy. 

“Spec building a neighborhood retail center based on the amount of future housing starts and trying to fill those spaces after construction is gone,” Silivanch said. “After some banks were left with empty retail inventories, the only way they are going to sign off on anything is if more than 60 percent of the proposed center is preleased . . . and even that can get complicated.”

Don Harley, owner and principal broker of Wilmington-based Harley & Associates Commercial Real Estate, Inc., agreed.

“Build to suits don’t happen over night,” Harley said. “They may appear similar, but they’re all different. Today, everything depends on financing, the size of the development, credit worthiness of the tenant, credit worthiness of the developer . . . if those issues aren’t addressed early, then the deal is in danger.”

Harley is currently working with a number of build-to-suit retailers looking to construct new stores in Wilmington and throughout the region; however, he would not comment about who those retailers are. He said while his firm has not experienced an uptick in junior tenant requests, he agrees activity in the retail sector is rising.

“I don’t think we’ll see a flood of new real estate come on board,” Harley said of new junior box retail space. “People are seeing a lot on their plate, but that doesn’t mean it will result in a transaction.”

Brian Eckel, managing partner and broker with Wilmington-based Cape Fear Commercial, said his firm is also “in discussions” with several unnamed retailers looking for build-to-suit opportunities in greater Wilmington.

Eckel said after the economic downturn, many large-scale retailers are scaling back in size.

“Footprints are shrinking for most of the box categories out there, except for the discount warehouse clubs of the world,” Eckel said. “I would say that the category of retail that is most active includes national quick service restaurants, as well as the mid-price point sit- down restaurants.”

Cape Fear Commercial officials recently signed a Beaumont,TX-based Jason’s Deli franchise to join a nearly 7,900-square-foot retail center along Market Street near Costco. Eckel added his firm is also working with a number of other retailers for more development planned around the Costco center.

“They will find a way to get into Wilmington,” Eckel said.  “Most likely the new transactions will be build to suit developments.”

Overall, many are taking the shortage in junior box space as a welcoming sign that economic conditions are improving.

“For the last two to three years, everyone has tried to weather the storm,” Warwick said. “Now the economy seems to be feeling better, and Wilmington is an attractive market . . . I think it’s a sign we have hopefully weathered the worse of the economic downturn.”