As New Jersey continues to emerge from the recession, observers are noticing changes in the commercial retail real estate landscape: Bigger isn’t better, but variety is. And for the time being, it’s a tenant’s market.
In 2002, vacant storefronts represented about 2 percent of the shopping corridors in the central and northern parts of New Jersey. Buildings didn’t stay empty for long. Because space was at a premium, rents were high.
When big box stores such as Bradlees or Caldors went out of business, other enterprises like Kohl’s or Home Depot moved in.
But as the dark clouds of the recession roiled over New Jersey, large and small retailers became tentative. A survey of lease renewals by CoStar Group, a commercial real estate information company, showed 10-year lease renewals for retail outlets began plummeting in 2005, while one-year leases climbed dramatically.
Ryan McCullough, a vice president at CoStar, said it was as if stores had been placed on “a waiting list for foreclosure.” Parent companies wanted to take a wait-and-see approach before making long-term commitments. At the same time, landlords, looking to hold on to their tenants, lowered rents.
By the fourth quarter of 2006, the vacancy rate had risen to 7.6 percent and rents were $20.92 per square foot, according to CoStar. In the first quarter of this year, however, the vacancy rate is 6.6 percent while rents average $19.37. And lease lengths are showing signs of growing longer again.
“Think of it as a sign of retailer confidence,” said McCullough.
Marta Villa, vice president of CBRE, a commercial real estate firm, said, “One reason for the longer lease is the lower rents brought on by the recession. If (a retailer’s) lease is coming due in the next 24 months, they want to get in there and tie up that space.”
Villa said it is part of the new mantra in the commercial real estate market: “blend and extend.” In addition to extending leases, she said landlords are also willing to shake up the mix of outlets on a property.
Landlords have “become more receptive to filling space with nontraditional uses, like fitness centers, or day care or medical centers,” she said. “Gyms are one of the major retail sectors on the move.”
Fast food franchises are also growing rapidly in New Jersey, Villa said, as well as quick-serve restaurants like Smashburger or Chipotles.
Part of the uptick in activity is the lower rents
“A couple of years ago, we were fielding a lot of rent reduction requests,” said Matt Harding, president of Levin Management. “We reviewed them and we did work with tenants. But over the past 12 months, the number is slowing, absolutely.”