2024 Trends: Retail Breakdown

Interest Rates, Inflation, & Insurance 

Amongst the commercial real estate sectors, there is no question that retail has faced its own share of challenges. As national and local markets finally began to normalize after Covid-19, the Greater Baton Rouge Retail Market is now confronted with a new batch of obstacles.

Just when things were starting to improve, we got hit with the three I’s: interest rates, inflation and insurance – All of which have made the cost of doing business nearly unaffordable.
— Charlie Colvin, CCIM

Increased cost in materials, rising rates, and sizable insurance premiums has caused retail construction projects to come to a halt. Consequently, tenants redirected their focus to existing shopping centers. Landlords overseeing these centers have observed robust leasing activities and a surge in rental rates, spurred by heightened demand. However, even within existing centers, deals are encountering delays as the costs of building out spaces, along with permitting and design lead times, mount up.

As operating costs soar, landlords are shifting the burden onto tenants by imposing additional operating expense reimbursements, property taxes, and property insurance. This ripple effect compels retailers to raise prices on goods and services to offset the surge in operating expenses.

In our market, the scant new construction deals predominantly cater to owner-occupied users like grocery stores and out-parcels. Meanwhile, the pace of shopping center developments and large retail investment sales has slowed considerably due to elevated interest rates and heightened equity requirements. This trend reflects a cautious approach among investors and developers amid the evolving economic landscape.

Vacancy Rates & Gross Rent

Retail vacancy rates in the Capital Region are still in good shape, despite their rise from 7.17% in 2022 to 8.02% in the spring of 2024.

 

Rental rates rose from about $19.83 per square foot to $20.68 per square foot, a $0.85 / SF increase between 2023 to 2024. This is consistent with what we are seeing nationally with a 9.3% increase in operating expenses as reported by ICSC, the retail trade group. Vacancy rates have ticked up a bit but still well below the 10% rate that is indicative of a healthy retail market. And total rents crossed $20/SF market wide for the first time.

Bankruptcies  

As anticipated, retail bankruptcies increased in 2023, affecting well-known brands such as Bed Bath & Beyond, Rite Aid, Tuesday Morning, and Party City. However, it wasn't just brick-and-mortar retailers that filed for bankruptcy; digitally native retailers like Blue Apron and Smile Direct Club also struggled, as higher interest rates made debt service obligations unmanageable.

 

Aside from Rite Aid and Bed Bath & Beyond, bankruptcies in the latter half of 2023 did not lead to many store closures. While net closures significantly surpassed store openings through 2020, store openings have outpaced closures since 2021. Bed Bath & Beyond led store closures in 2023 with over 900 locations shutting down, but many of these were quickly released to other retailers seeking expansion. Discount retailers have driven the increase in store openings, with Dollar General planning to open an additional 800 stores this year.

 

Retail Challenges  

Consumer Debt

Retailers face the burden of the the significant consumer debt carried by Americans. Credit card debt in the U.S. is expected to hit record levels in 2024, with balances already exceeding $1.1 trillion. This surge in credit spending, particularly during the holiday season, combined with increasing delinquency rates, signals growing financial strain among consumers, especially younger individuals and those with lower incomes.

Organized Retail Crime

As we recover from the COVID-19 pandemic, a new threat has emerged: Organized Retail Crime (ORC). In 2023, retail sales lost to theft exceeded $122 billion, more than double the amount in 2019. ORC involves the large-scale theft of retail merchandise by coordinated groups, who typically intend to resell the stolen goods for profit. This rise in ORC has significantly impacted retailers' operations, particularly in areas with more lenient shoplifting laws. For instance, Target recently announced the closure of nine stores in markets such as Portland, San Francisco, New York, and Seattle.

* Projected based on source data via National Retail Foundation

 

Labor force

Year-over-year inflation rose by a stronger-than-expected 3.5% in March, up from the 3.2% increase in February. This rise, combined with March’s robust employment report, indicates that reaching the Federal Reserve’s 2% inflation target might take longer than anticipated.

*E-commerce amount in $ trillions

 

Last year, e-commerce sales continued to grow steadily at a rate of 9.3%, now making up more than 15% of total retail sales. It's important to note that e-commerce sales encompass products or services ordered online, regardless of the payment or fulfillment method. Amazon now accounts for 40% of U.S. e-commerce sales.

 

Supermarket Mergers

Aldi, the German grocery chain has acquired Southeastern Grocers, including the Winn-Dixie brand, as part of its plan to add 800 stores across the U.S. by 2028. Driven by customer demand for more affordable grocery options, this expansion involves an investment of over $9 billion. The growth strategy includes both new store openings and converting some existing Winn-Dixie locations, beginning in mid-2024.

Another major planned supermarket merger has a much tougher road ahead. Kroger and Albertsons Companies planned a merger in 2022, with Kroger set to acquire Albertsons for $24 billion to expand their national presence and enhance omnichannel retailing. However, the FTC sued to block the merger, citing anticompetitive concerns. In response, Kroger and Albertsons proposed selling 579 stores to C&S Wholesale Grocers to address these concerns.

Kroger defends the merger in court, asserting that it will benefit customers, employees, and communities. However, when you consider all retailers selling groceries, such as Walmart, Target, Costco, as well as Instacart and Amazon, this merger would better position Kroger and Albertsons to compete with these dominant players.

Recent Retail Trends 

Generative AI

Generative AI is self-assured to revolutionize the retail industry by enhancing customer interactions with personalized service, inventory management, and product development with AI-driven design and customization. This technology promises to integrate seamlessly into both physical and online shopping experiences – From optimizing store layouts and product placements to offering virtual try-on capabilities, AI will create a more dynamic and personalized shopping environment.

Beauty Consumption

Younger age groups have shown increased interest in skin care and cosmetic products, largely driven by influencer marketing on Instagram and TikTok. Influencers post content on YouTube, reaching a wide audience of teens and tweens. This trend is evident in our market, similar to Sephora expanding into Acadian Village along with Lululemon and Madewell.

Additionally, Town Center has added several health and beauty retailers to its lineup. They signed ULTA several years back, although a number of users in this category have emerged, like Palm Beach Tan, building out now, who will be joining Amazing Lash Studio, Milan Laser Hair Removal, and European Wax Center.

Retail Conversions

Another trend we are observing is the adaptive reuse of buildings. This approach turns a challenge for one sector into an opportunity for another. The financial industry, for instance, has seen a shift towards online customer service and transactions, allowing them to operate with fewer branches. Inflation typically brings to mind the rising prices of goods, but it also significantly impacts the retail market through increased construction costs, which are now 25-40% higher than pre-pandemic levels. This scenario created an opportunity for Atomic Burger to purchase a site in Prairieville, where the site work and building were already completed.

Another bank conversion took place on Siegen Lane. The location, previously closed by Chase Bank, was leased to Blaze Pizza and Jersey Mike's last year. In a market with virtually no new retail development, retailers have had to be creative with site selections to fuel growth in highly desirable retail corridors.

Entertainment

After extended periods of lockdown, there has been a notable rise in "entertainment" venues, where dining intertwines with interactive activities like ping pong, bowling, and golf, catering to consumers' desire for immersive social experiences. These venues have experienced significant growth in both visits and sales, exemplified by the success of establishments like Chicken N Pickle, as well as increased foot traffic at Main Event and Topgolf. This trend underscores robust market demand and the effective repurposing of large retail spaces, enhancing their economic resilience.

In Baton Rouge, Surge, backed by Drew Brees, recently opened at Burbank and West Lee Drive. Additionally, a group supported by Gordon McKernan purchased the Oasis property on Burbank with plans to develop a restaurant and Pickleball venue.

At the Mall of Louisiana, Dick's Sporting Goods has secured a deal to occupy the former Sears space with their new concept, Dick's House of Sports. This large-scale retail concept, which spans over 120,000 square feet, goes beyond traditional sporting goods stores by offering an immersive sports experience. The store features a wide range of products and facilities that allow customers to engage in various sports activities. Key features include climbing walls, golf simulators, batting cages, and both indoor and outdoor tracks for testing equipment in realistic conditions.


Upcoming Projects 

Juban Crossing in Livingston Parish

  • Take 5 Car Wash, recently opened and Tire Engineers / Express Oil has purchased this site.

  • Discussions are in the works for a QSR for the site next to Andy Frozen Custard Site.

  • Barnes & Nobles – 23,500 SF of the former Bed Bath Beyond space, activity at this project for both new and existing space has remained strong. 

Florida Blvd & Ardenwood 

Rouses has opened and signed LOI (Letter of Intent) for the former Flea Market Space, with an outparcel available for lease. 

This investment will hopefully have a positive impact by bringing new capital to this often overlooked part of our city, encouraging other retailers and developers to consider investing as well. Florida Blvd has always experienced high traffic, which is crucial for the success of retail developments. As the much-needed work to widen Interstate 10 progresses, it is likely to divert additional traffic onto Florida Blvd, providing a further boost to area retailers.

Siegen Lane

  • This area includes the ALDI site built on Siegen at Rieger Road

  • Siegen Village was recently purchased and currently under construction. 

Up the road, an out-of-state developer purchased the former TJ Ribs site for $2.5 million and demolished it to make way for two new leases with Chipotle and another quick service restaurant.

This shift reflects changes in consumer preferences. While the sit-down, full-service model faced challenges, especially for dinner sales, the site has been repurposed into two smaller quick service restaurants, approximately 2,000 SF each, that will capitalize on drive-thru business.

Shoe Creek – Central

 

A lot of progress has been made at Shoe Creek, encompassing ALDI, Bank of Zachary, Walk-On’s with a smaller prototype, with two buildings opening with Tenants including CC’s Coffee, Jersey Mikes, Sport Clips, Five Guys Burger and Fries and Tropical Smoothie Café. One 2,000 SF Space remaining for lease.

Heritage Crossing in Gonzales

Alexander's market has opened and by all indications are doing really well with the adjacent retail building that has been fully leased.  

Tenants include, Freshter, Casual Creations, Knockouts and just signed vicious biscuit, a new to market breakfast concept. 

The shopping center also incorporates locations like Price Lebalnc Performing Arts Conference Center, multifamily Complex, and Sonny’s BBQ, opening summer 2024. The 4th retail building is 80% leased to Agave Blue, which will open by year end. 

Benton at Magnolia Woods

Benton at Magnolia Woods is the first new project in several years. Building will be going vertical by July, with anticipated delivery in the 4th quarter of 2024. This development will feature:

  • 10,000 SF of ground level retail with spaces targeted for Restaurant and Coffee Shop.

  • Another 10,000 SF of office space planned on the second floor

  • 5 acre park, water feature, walking trail and even space for a pop up ice cream vendor. 

This is the latest example of the evolving retail market. Consider developments like Benton, Heritage Crossing, Harveston, Long Farm, Rouzan, and several others—most new retail construction today serves as an amenity within larger mixed-use developments. These projects must be financially viable, which has become more challenging given current construction costs and interest rates.


Conclusion 

Predictions for next year indicate that the vacancy rate will remain in a very healthy range of 8-9%, as the demand from growing segments is still constrained by the limited supply of available space. We anticipate minimal rent increases with a few new projects coming online and older, outdated centers being redeveloped for other uses. Most new retail will likely be delivered within mixed-use projects rather than large standalone developments.

Although the retail market faces undeniable challenges, retailers, developers, and landlords can prepare to confront them directly. Not all will survive, but those who do will emerge stronger.

Source:

Charlie Colvin, CCIM – Chairman & Speaker, Momentum Commercial Real Estate

Retail TRENDS Committee


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