Michael Hazinski leads investment strategy and drives portfolio value as Chief Investment Officer at First National Realty Partners.
Convenience retail, consisting of grocery and unanchored shopping centers, continues to benefit from strong supply-and-demand fundamentals. On the supply side, there is very little new development as high construction costs keep new projects from being delivered.
Meanwhile, demand remains strong as convenience-oriented retailers, service providers, and food and beverage operators continue to see robust sales gains that fuel new store expansions. This supply-demand dynamic has driven occupancy, rent growth and tenant retention in retail shopping centers. Coupled with the higher yields relative to other property types and the resilience of shopping centers, these factors have fueled strong pricing and competition in the investment sales market.
The Importance Of Competitive Positioning
The tailwinds at the backs of shopping center owners are even more pronounced for best-of-the-best retail assets. These top-performing assets with superior competitive positioning benefit from a flight to quality, both from tenants and investors. Simply put, strong competitive positioning tends to yield a sustainable competitive advantage, making top retail assets increasingly desirable over time.
Unlike most other property types, shopping centers cannot rely solely on capital investment for improvement. Instead, the competitive advantage of the best retail assets is often difficult to replicate. This means that as weaker retail assets lose relevance with customers and retailers, top assets become even more significant in their respective markets. As such, identifying assets with a strong market position is key for investors seeking long-term performance.
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Evaluating Top Retail Assets
A fundamental evaluation of both the sub-market and individual shopping centers is essential to identify which retail assets are best positioned for future success. Below are several key factors that may contribute to a shopping center’s potential outperformance. Each of these should be assessed not only for the subject property but also for nearby competing properties:
Location: How well-located is the subject property to the customers it serves?
Tenancy: How productive are the current tenants? Are these the best tenants to serve the market, or should some re-tenanting occur?
Access, Visibility And Parking: Is the property easily accessible and visible for retail customers? Is there too much parking (opportunity) or too little parking (risk)?
Signage: Is the property signage adequate—is it well-presented and visible?
Configuration: Is the property well-configured with the appropriate amount of space, frontage and depth? Are some spaces inherently less valuable/more difficult to lease due to specific space limitations?
Physical Condition: Is the property physically appealing and functional? Is there deferred maintenance at the property that should be addressed?
Traffic Patterns: Does the shopping center front a primary thoroughfare, or are other retail corridors more active?
Market Demand Drivers: Is the shopping center located near demand drivers, including residential, office, entertainment, etc.?
Local Supply/Demand: How much competing retail space is there in the sub-market? How do the occupancy and rents compare?
Barriers To New Development: Is there available land nearby, and what are the entitlement barriers to building competing shopping centers?
Demographic Trends: Is the sub-market expanding or contracting, and how do any changes in the surrounding customer impact the merchandising of the shopping center?
The Bottom Line
As the retail landscape continues to evolve, best-in-class convenience retail properties remain attractive investment options. Top shopping centers with strong competitive positioning are likely to strengthen further over time, often at the expense of weaker retail assets. By focusing on competitive positioning and staying attuned to market dynamics, investors are better positioned to harvest long-term value in retail shopping centers.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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