Store rents challenge chains
Retail occupancy costs could be a problem for retailers seeking rapid expansion in the U.S.
During a panel discussion at the recent NRF Big Show on shopping center development, David Zoba, SVP global real estate and store development at Gap, Inc., said, "Rents are a challenge in the U.S and are reaching a point of rent/occupancy cost levels that will cause a lot of retailers a crisis, clipping growth. We can’t pay these rents and have a viable business."
William Taubman, COO at Taubman Centers, Inc., supported Mr. Zoba’s assessment by noting developers "have been driving rents to record heights."
According to Reis, a research provider on commercial real estate performance and analysis, asking rents for regional malls grew 1.8 percent during 2014, and rents have increased every quarter over the past four years. In some major markets, last year’s rent increases exceeded the national average by a substantial margin. In San Francisco, according to Reis, rents rose 4.3 percent last year, Phoenix, 2.5 percent and Miami, 4.0 percent.
Prime real estate is through the roof. For example, on New York City’s upper Fifth Avenue, the average rent per square foot is $3,500, according to Cushman and Wakefield. This represents a 13 percent increase year over year.
The relentless growth in occupancy costs was attributed to several causes. Retail growth has been sluggish and only now beginning to experience a resurgence. At the same time, e-commerce has become a much stronger factor at retail and the correct balance between online and bricks-and-mortar has by no means been ascertained.
In addition, the U.S. market is overstored as well as being over-spaced in terms of shopping centers and malls. There has been no mall construction except expansions of existing malls. Vacancy rates are low, and for top malls, vacancies are non-existent. For these reasons, landlords have considerable strength in pricing power. Moreover, continued improvement in the economy and wage gains may means that rents will continue to increase.
- Retail rents on the rise as Space at a Premium – The Wall Street Journal (sub. required)
- Top 10 U.S. Retail Markets – RIS News
- Real Estate Market Reports – Cushman & Wakefield
Will rents curb retailer plans for expansion and hurt sales and profit growth in the coming year? What strategies are open to retailers to maintain expansion and growth? What factors could slow increases in store rents?