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Feature Article  

Get Creative, lease rates are more competitive by Ben Chiaro, CCIM

Despite the economic recession, south-central Pennsylvania’s retail real estate market has remained relatively stable.  At the national level, the majority of 2009 proved to be a volatile year for retailers and shopping center owners.  Bankruptcies, store closings, and reductions in the expansion pipeline by national chain tenants have led to an overall shopping center vacancy rate of over 12%.  However, the retail market in York County has weathered the storm better than major US markets such as New York, Florida, and California.  At the end of the fourth quarter 2009, the overall York County vacancy rate for strip centers was 10.79%, down from nearly 12% the previous quarter.  Free-standing retail vacancies remained even more stable, ending the year at a vacancy rate of only 3.49%.  The regional enclosed malls have been hit the hardest.  This category began the year with 7.52% vacancy, and rounded out the fourth quarter at a whopping 18.4% vacancy rate.

Creative brokers and aggressive landlords are still leasing space.  Landlords should be willing to consider non-traditional tenants to fill vacancies, such as medical offices, churches, and institutional uses.  There are still tenants who are expanding; however, due to capital constraints, they are limited to the amount of cash they are able to invest in store build-out.  More tenants are requiring higher levels of landlord contributions to fit-out costs.  Cash is king, and Landlords that are able to contribute tenant improvement dollars to the deal are landing the tenants.  Non-traditional shopping center tenants, such as medical offices, require even more expensive build-out and longer construction timelines than traditional retail store formats.  However, medical users also seem less-impacted by economic conditions, therefore enabling them to pay higher rents than more traditional retailers who survive mostly on discretionary spending.  For example, Ability Prosthetics and Orthotics was able to take advantage of a highly-visible 2,880 square-foot end-cap at Colonial Shopping Center in Spring Garden Township formerly occupied by M&T Bank.  The dated layout of the space, which included only one drive-thru window and a walk-up indoor ATM, coupled with the lack of banks in expansion mode during 2009, made it difficult to replace the former bank with the same use.  However, the shopping center’s location across from York Hospital and ease of access to I-83 made the center a perfect fit for a new Ability location.  Additionally, the landlords were willing to contribute a substantial tenant improvement allowance for Ability to convert the space.  Although the use is medical office and sales, Ability is expected to drive foot-traffic to the center which already derives a large percentage of its customer base from the hospital’s employees, patients, and visitors, and will compliment Minnich’s Pharmacy, the anchor tenant.

Retailers are also taking advantage of lower, more competitive lease rates and backfilling older vacant spaces.  Examples include Kohl’s planning to open a third York County location at the West Manchester Mall in the former Value City Department Store space; hhgregg, an electronics retailer, is under construction in the 37,000 square-foot former Linen’s & Things at Manchester Crossroads; finally, Super Shoes backfilled the former 20,000 SF Ben Franklin Crafts space at York Marketplace in Springettsbury Township in early 2009.  ROCK represented Super Shoes in the site selection process and lease negotiations, which were successful again due to the landlord’s cash position, giving them the ability to provide a major tenant improvement allowance combined with an aggressive lease rate.

In summary, leasing activity seems to be picking up.  Economists are reporting that the recession is winding down and we are entering into a recovery mode.  With the already stable market conditions, we must continue to be aggressive with tenants and use creative approaches to make deals.