Insights on Today’s Retail Leasing Landscape

A Q&A with First Western Properties

Rising construction costs, advancements in technology, and reviving dying shopping centers – these are just a few of the issues we see impacting today’s retail landscape in the Northwest.

To help us make sense of this, we sat down with Justin Holmes and Josh Parnell of First Western Properties to gain their retail leasing insights in a changing world.

 

CP: With changes in co-tenancy, such as uses like fitness in shopping centers, are tenants becoming more flexible to prevent dying centers?

FWP: At First Western Properties we are thinking about the leasing very differently than we did 5 years ago.  While we haven’t seen all Tenants show flexibility on their co-tenancy clauses, there is a realization of the evolution of shopping.  We’ve seen forward-thinking retailers provide waivers to allow uses that their leases and REA agreements would typically disallow.

CP: Construction Costs vs Acceptable Rents: Are we at a breaking point where Tenants can’t afford new construction in the Northwest?

FWP: With some new construction projects we have hit the tipping point. On a market-by-market basis, we are close to a point where the construction costs and required rents to underwrite a deal are becoming challenging. While there are use categories, such as food and medical, that can support the higher rents, we have experienced difficulties convincing service users to pay the rents that need to be achieved. 

As construction costs continue to rise we are forced to push market rents – sometimes at the expense of long-term rent growth. In addition to higher rents, Tenants have to absorb higher build-out cost for their improvements.

CP: What other trends are just starting to come to the Northwest?

FWP: The strength of the Northwest economy has allowed us to be a trend setting market.  At the moment we’re seeing the most activity in food, medical, and fitness, in addition to mixed-use apartment developments with ground floor retail. As a result, it’s important for developers and brokers to recognize how the leasing of retail impacts the residential components surrounding them.

CP: How is technology changing from a Tenant’s perspective?

FWP: In order for Tenants to stay relevant and competitive in today’s marketplace they have to be forward thinking about technology. We’ve seen Tenants leverage social media, data, and analytics to effectively market to their customers and evolve their product offerings where necessary.

Additionally, Tenants are becoming more concerned with speed of service and convenience to customers, such as mobile ordering, self-check-out, delivery of food/groceries, and online check-in.

Technology has the ability to enhance the retail experience and Tenants that recognize this will continue to thrive.

CP: How are green building techniques, solar, etc. starting to trickle down into the smaller shopping centers/single tenant buildings?

FWP: We haven’t seen a lot of green building outside of Seattle’s CBD, the Bellevue core or mixed-use projects. While green building is desirable based on its environmental impact, the costs to build are higher. This circles back to the construction costs vs. acceptable rents conversation again. In our opinion, Tenants are not willing to pay a premium for this type of construction.

The times we have seen green building implemented is primarily when government regulations or political pressure is on the developer, which forces this initiative.