The Inside Look with Xander Snyder - Episode 23

Explore the market forces behind recent retail store closures and their impact on landlords. Xander shares insights on expiring leases, prime location demand, and why space strategy matters in commercial real estate.

Hi, I'm Xander Snyder, and this is First American Title Inside Look.

Now, before I get into it today, let me first say that if you've noticed I've been a little less active on social media lately, it's because I've been out on paternity leave welcoming my first child to the world. And let me tell you, nothing quite says new parent life like reading transcripts of retail re -earnings calls during newborn contact nabs. I mean, after all, what else are you going to do when you're trapped under a sleeping baby for two hours? That remote control is just always right out of reach, am I right? But now I'm back and ready to get into the world of commercial real estate. So let's dive into it. So what did we learn from those second quarter earnings calls. Well, a number of retail store closers that were widely discussed earlier this year now occurred and have been released at higher rents. So why is that? Well, first, there's a serious shortage of quality retail space available for lease. And second, many of these failing retailers were locked into below market rents. Now, this is due to the structure of retail leases. They're usually long term, say five to 10 years and have contractually agreed upon increases, usually on an annual basis. So if market rental rates rise faster than those contractually obligated annual increases, you can end up with a tenant paying substantially below market rent. I wrote more about this dynamic in a blog post before I left, which will include in the show notes below. This difference between the in -place rent and the market rent is referred to as a leasing spread. Now, these leasing spreads were widely discussed in second -quarter earnings calls. In fact, leasing spreads for some of the specific headline store closures were even mentioned, such as Joanne's, Big Lots, and Party City. Landlords have been able to release some of these same spaces were between 15 and 80 percent higher than what they were previously getting from the now -failed retailers. While retail rates that had to retent the space did report a small dip in occupancy during the transition to new tenants, these were temporary and not substantial. So here's what the doomsayers were missing. For many retail store closures that occurred this year, there were other retail tenants waiting in the wings to grab previously unavailable prime locations. And this brings us to a fundamental truth about all commercial real estate, not just retail properties. It's about the space, not the specific business occupying the space. A corner location with great visibility and foot traffic doesn't necessarily become less valuable just because one tenant couldn't make it work there. In commercial real estate, location and quality are everything. Good retail space will have a much easier time finding new tenants. In fact, sometimes losing a struggling tenant can be the best thing that happens to a property owner, so long as the loss and income that occurs during the temporary dip -in occupancy is not large enough to lead to an operating place. Now, I don't want to sugarcoat everything. There are some real headwinds facing the American consumer over the next 12 to 18 months. As these unfold, spending patterns will shift, and some retail sectors will struggle more than others. However, successful retailers will find that high -quality retail space remains high demand and limited supply. Thanks for watching this episode of The Inside Look. I'll see you next time.