3 Reasons Anchored Centers Outperform and 3 Strategies to Compete

As the recovery slowly continues and the dust settles, we are seeing some clear and notable patterns. While overall Tucson vacancy rates have climbed from an all-time low of 3.1% in 4Q 2005 to a high of 8.8% in 1Q 2011, not all properties have fared equally. As landlord requirements on credit have loosened and preferences begin to shift from national to local tenants, a consistent “flight to quality” has occurred. Tenants are moving from mid-block, unanchored shopping centers to anchored–largely corner–properties, creating a dichotomy in occupancies and lease rates for these two distinct types of centers.

Fig. 1- Comparison of Vacancy Rates: Overall Retail Vacancy vs Anchored Shopping Centers & Unanchored Strip Centers 2005-2011

As shown above, unanchored strip centers are posting a 15.6% vacancy, while grocery-anchored centers are enjoying a vacancy rate of only 7.0%. This represents a major shift over the past three years. At the end of 3Q 2008, anchored centers were 11.8% vacant and unanchored strips held at 8.6%. Pre-recession, unanchored strips were the natural choice for local retailers, due to lower rent demands and easier landlord qualification on credit history. During that period, landlords of anchored centers had higher rent and credit expectations and a pronounced preference for national tenants with name and credit over local “mom and pop” stores.

Why the performance shift?

1. Availability: Space became available in the higher quality centers due to national chain bankruptcies and other retail store closings, creating enhanced availability.
2. Rates and credit: Grocery-anchored centers reduced lease rates and the landlords relaxed their credit standards.
3. Survival of the Fittest: Tenants maintaining sales during the recession have seen many competitors fall by the wayside. As the market thins, coveted consumer dollars are awarded to surviving retailers. While not a true windfall, this augmented cash flow has allowed local tenants to improve locations and visibility into centers previously out of reach.

The result? A “flight to quality” out of mid-block strips and into grocery-anchored centers by strong local and regional retailers. Unanchored strips have desperately slashed lease rates in an effort to compete (Fig. 2 below). Nevertheless, the superior visibility, foot traffic, and overall credibility of anchored shopping centers have stymied the efforts of smaller strip landlords to retain tenancy. Until vacancy rates in anchored centers drops to 3%, unanchored, mid-block shopping centers will continue to struggle.

Fig. 2- Comparison of Asking Lease Rates: Overall Market Retail Asking Rates vs Anchored Shopping Centers & Unanchored Strip Centers 2005-2011

What can I do if I own an unanchored shopping center?

1. Keep your rates competitive. In a tough battle, do all you can to make your property financially attractive. Vacancy costs more.
2. Keep your existing tenants. Attend to tenant needs; manage and maintain your property and curb appeal. Numerous landlords would like to take your tenants from you.
3. Hire a good broker. Putting a sign up and posting on Loopnet or CoStar is the minimum, not the total effort. Your broker needs to actively call prospective tenants. He/she needs to be creative and aware of changes in the marketplace that can improve your position. They must have good relationships with other brokers to attract new tenants.

Rob Tomlinson has been clearly focused on the needs of retail landlords and tenants for over twelve years. With valuable insight on the dynamics of the site selection process, experience with assemblages, and education in Urban Geography, Site Analysis, and Land Use Planning, Rob brings an informed perspective to challenging sites. A CCIM Candidate and International Council of Shopping Centers (ICSC) member, Rob has countless hours on land use commissions and committees and public/private development efforts.