Power centers, now a big part of the American shopping experience, are showing an unexpected durability.
These open-air retail behemoths — perhaps anchored by a big-box store, supermarket or office supply chain — have weathered the recession and intensifying e-commerce rivalry, though that combo proved lethal to some tenants.
By reconfiguring buildings and landing expansion-minded national discounters, specialty grocers and other chains, landlords have pared the average vacancy to 6.3% nationwide from a peak of 10.2% in the first quarter of 2009, according to Garrick Brown, research director for commercial real estate brokerage Cassidy Turley.
That's better than the overall retail property sector — including malls, grocery-anchored neighborhood centers and lifestyle shopping centers — which has an average vacancy of around 8.7%, says Brown.
In the midst of the recession, most retail prognosticators couldn't have imagined such a dramatic occupancy rebound in power centers, a concept that emerged in the late 20th century to accommodate big-box or "category killer" retailers that sell a group of related goods such as electronics or office supplies in copious amounts of space.
Some major power center tenants including Borders Group, Circuit City and Linens & Things died off. Meanwhile, survivors such as Office Depot (ODP), Barnes & Noble (BKS) and Best Buy (BBY) are generally looking to reduce the number of stores or the size of some stores, or both, as online competitors continue to pressure the formats.
New Things In Store
While that would seem to spell trouble for the hulking power center properties, which range from roughly 250,000 square feet to nearly 1 million, so far it hasn't.
"Looking at the big picture trends, the power center is the product type where you would expect to see the most damage — basically we're in the twilight of the big box," Brown said. "But really what we're seeing is power centers completely adapt.
Among their other adjustments, power center landlords have shifted their attention to retailers less susceptible to online poaching and more agreeable to occupying a space that may fall short of their preferred specifications, he adds. Landlords are signing TJX Cos.' (TJX) T.J. Maxx, Ross Stores' (ROST) Ross Dress for Less, Five Below (FIVE), Nordstrom (JWN) Rack, and other discount or off-price clothing and soft goods retailers.
Power center owners also are adding more grocers, which like the traffic that national retailers in the centers generate, said Joseph Tichar, senior vice president of corporate operations for Cleveland-based DDR (DDR), a real estate investment trust that owns 117 million square feet of primarily power center space in the U.S., Puerto Rico and Brazil.
Traditional power center anchor tenants Wal-mart (WMT) and Target (TGT) have been expanding their grocery offerings into more stores, he said, while specialty grocers like Whole Foods (WFM), Sprouts Farmers Market (SFM) and Trader Joe's continue to proliferate.
Both groups are taking market share from traditional grocery stores, according to a DDR investor presentation that cited U.S. Census Bureau data.
"The grocery business has been evolving rapidly and competition in that space is fierce," DDR's Tichar said. "Consumers are telling us that they don't need to shop in a traditional neighborhood center to buy groceries.
Regardless of what type of tenant they're hunting, power center owners are paying particular attention to identifying retailers with strong balance sheets, cash flow and credit — traits that the defunct big boxes too often lacked. To a large extent, those requirements have put the focus on national chains in favor of either local or regional operators, Tichar says.
Power center landlords also are rearranging space to accommodate new tenants or to reduce the footprint of anchor tenants. In Chicago, for example, DDR spent $11.6 million to consolidate several small shops and construct more space in its Brookside Marketplace power center to make room for T.J. Maxx, Ross Dress for Less, Pier 1 Imports (PIR) and Panera Bread (PNRA).
Properties Under Pressure
Despite the rebounding optimism around power centers, the properties still face challenges, notes Suzanne Mulvee, director of retail research for Property Portfolio Research, a subsidiary of commercial real estate information provider CoStar Group (CSGP).
To cut down on overhead, discount retailers generally want rent to represent about 6% of revenues versus the 10% to 12% that more traditional retailers have historically aimed for, she says. Plus, certain power center tenants such as bookstores and electronics sellers still face a rather daunting e-commerce threat.
"I think there's a lot of pressure on the sector," she said. "These tenants are being forced to compete with Amazon (AMZN), and as Amazon increases its speed of delivery to customers, it has the potential to erode market share materially.
Tichar acknowledges that the changing retailing landscape had pressured power center rents. Typically the REIT aims for tenants to pay a rental rate that reflects about 10% of revenues, on average, across its properties. It's now at about 8%, he says.
Future Of Shopping
Yet a host of retailers and grocery concepts are still in expansion mode and virtually no new power center construction is taking place, he says. So as tenants see their year-over-year sales and market share grow, DDR will have more opportunities to achieve its 10% goal.
Additionally, hundreds of leases at below-market rental rates with weaker retailers are set to expire over the next few years, he adds, and the company is proactively marketing the space to line up better tenants at higher rents. In one example, the company suggests that it could increase rents in 11 Barnes & Noble locations by 25% to 75% when the retailer's leases end in 2016, according to an investor presentation.
"In retail, especially in the power center space, people like to talk about the death of the big box and the fact that there are a lot of retailers that have had to close their doors," Tichar said. "What people seem to miss is that while there are some retailers that are slowly going away or that have gone away, the list of retailers that are looking to grow is far stronger and has much more depth."