Retail Occupier Distribution

Retail Real Estate is a broad concept where different sub-categories of retail have very different types of tenants and thus behave differently towards shocks, either the e-commerce disruption or the current pandemic.

We have selected 6 markets at random (Albuquerque, Boston, Las Vegas, Memphis, San Francisco, and Phoenix) and by analyzing their tenant mix, we have been able to get a general idea of the different types of tenants represented in Lifestyle and Mall, Power Centers, Neighborhood Community, and Strip Centers (NCS).

The tenant information data is retrieved from Costar and aggregated based on our own category. Here is Costar’s definition of these retail sub-types.

Lifestyle & Mall

Lifestyle and Mall occupied around 9% of the total retail stock that we track but received much more press attention than other categories of retail real estate. As expected, the majority of space in lifestyle and mall centers is occupied by department stores and general merchandise stores (38.2%) and apparel tenants (22.6%).  These two combined took over 60% of total spaces. And if we dive deeper into the department and general merchandise stores category, you'll notice around half the spaces are occupied by traditional department stores like Dillard's, JC Penney, and Macy's. Traditional department stores were experiencing great challenges even before the pandemic, losing their appeal to consumers and losing market share to e-commerce, specialty stores, and discount retailers. The same goes for apparel retailers, though the story varies from brand to brand, the shrinking middle class is also cutting their spending on apparel and more and more consumers are shifting their spending on other categories like services.

The pandemic is an accelerator for many of those struggling retailers, leaving many filing for bankruptcies, which further exacerbates the situation of the lifestyle and mall sector. In addition, many lifestyle and mall owners have been introducing service tenants into the mix. Service-oriented tenants like Food & Beverage (F&B) stores were also one of the hardest-hit sectors due to regulatory restrictions and consumers shunning away from public spaces. According to our aggregation, around 7% of the total space is occupied by F&B retailers, and around 8% is occupied by art, entertainment, and recreation tenants. This includes theaters, arcades, etc. This tenant composition probably explains why the availability rate for the Lifestyle and Mall sector has increased 84 bps since Q1 2020, the highest among the sub-categories.

Compared to the other two sectors, Lifestyle and Mall centers tend to have less variety of retailer types. Its top 5 retail categories took 82.7% of total space. But the Power Center is only 66% and the NCS center is 62.5%.

Power Centers

Unlike Lifestyle and Mall, power centers have fewer apparel-based retailers. The top three retail categories are General Merchants and Department stores (33.2%), Apparel and Accessories (11.1%), and Home Furnishing Stores (7.5%). One thing to stress here is that "department stores and general merchandise stores" is a very broad concept and include very different brands. According to NAICS, Target and Walmart are also considered department stores because the assortment they sell, and their employment number meet the criteria of a department store. So, looking closer at the composition of department stores and general merchandise stores, we notice that the tenants of Power Centers are very different from the Lifestyle and Malls. The top 3 tenants are Walmart, Target, and Kohl's. Also, over 15% of space goes to discount retailers like Burlington Stores, T.J.Maxx, Five Below, and Dollar Tree. Looking at the apparel and accessories category, it is also telling a similar story. The top three tenants are Ross Dress for Less, Marshalls, and Old Navy, which are also retailers that focus on bargains.

Interestingly, Power Centers have much more Building Material and Supply shops (7%) than other categories. Looking closer, we realize that these stores are mostly Home Depot's and Lowes' (classified by SIC into "Lumber and Building Materials Dealers").

Neighborhood Community & Strip Centers

In Q1 2021, Neighborhood Community and Strip Center's (NCS) availability rate decreased 24 bps from last quarter. It is the only sector that showed a decrease in availability this quarter. This sets this sub-property type apart from the other two and makes people wonder why this sector is quicker into recovery.

Looking at its tenant composition, the space in our sample is predominantly occupied by Grocery and Convenient Stores (22.1%). Followed by Department Stores and General Merchandise Stores, occupying about 12.9% of space. Similar to Power Centers, most of the space is occupied by big general merchandise brands that aim to provide everyday essentials. The top three brands are Walmart (26%), Target (19%), and Dollar Tree (10.5%).

Food and Beverage stores are the next in line, occupying 11% of space. It's interesting to see Food and Beverage stores take more space in NCS centers. It only occupied 6.5% in Power Centers and 8.6% in Lifestyle and Mall. This means more restaurant and bar owners are choosing to stay close to where people live as the trade area for strip centers is usually within 1 mile; for neighborhood centers, it's usually within 3 miles, and 3-6 miles for community centers according to ICSC's definition.

Professional service and personal service tenants also took much more share in the NCS centers (14.2%) compared to Power Centers (4.5%) and Lifestyle and Mall (3.6%). This is another attribute of NCS centers that distinguishes them from others. The service sector is a wide category that includes a variety of different groups. Some prominent professional service groups include banks, real estate/insurance agencies, telecommunication companies and personal services include laundry shops, beauty shops, and barbershops. These shops need to be close to their consumers to provide everyday service in the most convenient way.

Depending on the types of services they provide, these tenants have different stories during this pandemic. However, the good news is that we are seeing more and more positivity in the local economy. According to Yelp, new businesses in Q1 2021 hit the highest level since the start of the pandemic. Some categories like restaurant and food, home services, local services, professional services, and automotive services saw a significant number of new businesses opening, a higher number than Q1 2020 levels.

Apparel tenants occupied less than 5% of total stock in the NCS centers, the lowest among them all. However, Healthcare related tenants (fitness, physical therapy, dentist, etc.) have the highest occupancy (around 8%) in the NCS centers. It is not a surprise to see those healthcare related tenants moving to NCS retail space as it provides more exposure to consumers who regularly frequent the center to buy groceries or do their dry cleaning.

Conclusion

Tenant composition is a fluid concept as it changes from center to center and from market to market. For example, a Power Center with Home Depot and T.J.Maxx as anchor tenants will behave differently from another one that house JC Penny and Stein Mart as anchor tenants. However, they do follow some patterns and what this analysis intends to show is to understand what types of tenants usually choose to reside in what types of retail real estate and how different they are from each other. We are hoping to use this analysis to help us understand the movement of rent and availability and guide us in future forecast modeling upgrades.