Commercial Magazine

Q&A: Chris Angelone, JLL Capital Markets

After years of turmoil, retail has found its footing

By Jeff Bond

It may be hard to believe, but the retail real estate sector is actually expanding and in need of more space. After years of decline, including the disastrous impact of the COVID-19 pandemic, stores and shopping centers have stabilized and rents are rising. Scotsman Guide spoke with Chris Angelone of JLL Capital Markets this past December about the health of the retail sector and his expectations for 2024.

JLL’s U.S. retail outlook report for third-quarter 2023 stated that 145 million square feet of retail space has been demolished in the past five years. What has been the result of this change?

The reality is we are in a sub-5% vacancy environment right now. There’s literally no new space to lease. At the same time, there is a significant amount of retail demand for growth and expansion, and that is putting a lot of upward pressure on rents.

This year, we’ve seen rent growth in retail, something that hasn’t been achieved for a really long time. Compounding that is just the lack of new retail construction. If you go back to the 2006 through 2008 time frame, we were delivering about 150 million square feet of new retail space each year. But in the past couple of years, it’s been closer to 15 million square feet.

Do you see retail construction increasing this year?

In the short term, the answer is no. There are limited construction starts that are permitted and approved, or are already in the ground for 2024 and 2025. Given that there has been a reset in land values over the past 12 to 18 months, perhaps there will be an increase in retail construction. But it will have to be in 2026 and beyond. Costs have significantly increased, so it’s just really hard to make the economics work for new retail construction in primary and secondary market locations.

What do you see for the retail sector in 2024?

Rents are going to continue to rise in 2024, but the growth in retail is going to slow down a bit. I think we are still coming out of the pandemic-fueled environment, with retailers having great balance sheets and a lot of pent-up demand from consumers. But the consumer is coming under a little more pressure today, so I think that retail is going to continue to be really healthy, but consumers will be less exuberant and more realistic in their buying.

How will retailers handle the lack of new space?

Healthy retailers are going to be looking for creative ways to expand their footprint. They may retrofit vacant spaces that aren’t their typical prototype in order to build new stores. They may go into secondary and tertiary markets where they otherwise might not have gone before. You are likely to see some consolidation of retailers and that, perhaps, will create some opportunities either for expansion or addition through subtraction. If rates cooperate and we are in a lower interest rate environment — and given the amount of new capital that wants to be in retail — there is going to be a ton of investment activity in the retail space.

The JLL retail report showed that malls were still suffering due to negative absorption in 2023. What do you see happening with malls this year?

What’s happening in the mall space is continued bifurcation between models that are thriving and properties that require reinvention. The best-in-class, fortress-style malls are actually seeing increased productivity and really strong same-store sales growth. In most instances, the best of the best assets are performing as well, if not better, than they ever have.

How are malls reinventing themselves?

In some cities, you continue to see multifamily developments at malls. You will also see more medical offices. Malls are sort of living, breathing organisms, and I think they drive a lot of traffic. So, they have the ability to sustain and generate other uses at the mall as well.

A lot of the better-quality malls have more outward-facing food, beverage and entertainment elements to them. It’s not just pass through a door and enter a cavernous mall space today. There is a lot of activity in terms of repositioning and redevelopment, including creating exterior spaces around entrances. It is not just an inward-facing product anymore. ●


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