Retail Leasing Strategies and Perspectives

For commercial real estate developers, there is a lot that goes into creating a retail or mixed-use center that has durable and distinctive community appeal. But perhaps no ingredient in the recipe for great spaces and places is as important as a diverse and dynamic tenant mix.

Expanding Capabilities—New Complexities

As WMG has grown and evolved over the years, we have continued to embrace an opportunistic development approach. Our expanding capabilities have positioned us well to thrive as a developer with the demonstrated ability to take on bigger and more complex projects and larger pieces of property. As the value calculus has shifted for smaller, one-acre outparcel opportunities, successful developers in our space need to be able to acquire and develop larger tracts of land to develop grocery-anchored shopping centers—many of which include not just outparcels, but also a multifamily component.

While the development dynamics might differ from one type of project to the next, one thing that all retail and mixed-use centers share is the need to connect with and cater to the surrounding community—primarily with retail tenants that appeal to consumers and give them a reason to visit. But achieving that goal isn’t always as easy as articulating it. There are many factors that can influence leasing strategy.

Credit vs. Curate

From a leasing standpoint, many grocery-anchored community centers across the State of Florida and around the country have traditionally followed a familiar formula: a complementary mix of F&B concepts and professional services tenants. But one underappreciated piece of the leasing puzzle is a developer’s skill at not just building a compelling tenant roster, but a mix of brands and businesses with both strong credit and a curated selection of local concepts. Sometimes you want a Great Clips, for example, and sometimes a local boutique salon might be a better fit. Similarly, sometimes a Pizza Hut is a great choice—while a local pizza brand might work well in another center.

At WMG, the credit versus curate balance is something we consider carefully when building out our tenant lineup. You want tenants with strong credit (for obvious reasons), but you also want enough unique and distinctive concepts to appeal to local consumers and distinguish yourself from the competition. There is no secret recipe, per se; creating a vibrant and interesting tenant mix is far more art than science. But, as we’ve seen again and again over the years, cross-pollination works: projects with a mix of familiar national brands and unique local tenants tend to be the most successful.

A Strong Foundation

Because anchors drive your credit and help keep your cap rate low when you go to sell, our existing relationship with a strong brand like Publix provides a solid foundation for building a diverse tenant roster. It also gives a landlord the ability to have more flexibility when it comes to investing in a “mom-and-pop” concept by supporting them with a tenant improvement allowance that enables them to build out their space/operation. Some of the best and most exciting new concepts not only need that initial boost, they are often grateful for the opportunity to realize their dream and cognizant of the risk the landlord is taking by investing in their business. And because character and connection is so important—a currency that carries weight with residents—making it a priority to include select up-and-coming local and regional concepts is a key part of a successful retail leasing approach.

An Evolving Mix

WMG’s roots with Heartland Dental have helped to make us somewhat of a pioneer in the sense that Heartland was one of the first medical users to see the benefits of a retail-centric location and complementary traditional retailers long before that was the norm. Today, retail centers are actively looking to bring in medical and other service tenants. WMG has long understood those synergies. The supporting power of medical related services and traditional retail concepts is in our professional DNA.

Although some medical tenants see the value of highly trafficked retail-centric locations, not all retail tenants may perceive the medical related services as complementary. For example, there are some anchor leases that prohibit or limit the number of medical or office space tenants at a retail shopping center—in some cases due to concerns about parking limitations. Nonetheless, higher demand both for and from medical users in retail environments is making medical service concepts (including some new and emerging popular uses like urgent care, for both human and animal wellness) an important arrow in a developer’s leasing quiver.

Disruptive Dynamics

The nature of economic boom and bust cycles and the natural ebb and flow of retail expansion and contraction have traditionally made leasing dynamics understandable, and, to an extent, predictable. But the last 15 years have seen dynamic swings for commercial real estate professionals. Vacancies and lack of demand in the wake of the Great Recession of the late 2000s tilted the industry into a more favorable tenants’ market. That paradigm persisted for years. But as occupancy rates went up and vacancy rates went down, things gradually shifted closer to equilibrium and ultimately into a landlord’s market. When the pandemic hit in 2020, the prevailing assumption was that it would be the Great Recession all over again. But targeted government relief and a quicker than expected retail recovery meant that we (particularly in Florida) never saw the anticipated precipitous drop in occupancy. For the last several years, vacancy has remained low and the landlord-favorable market state has persisted. At the same time, the higher costs of land, capital, and construction (materials and labor) have both slowed new growth and inhibited demand. That complex financial calculus is now one of the more consequential factors influencing a developer’s ability to execute a diverse leasing strategy. We have had deals with local and regional retailers fall through even with fully negotiated leases because their costs (e.g. financing, buildout, labor) were simply too high. In this environment, national brands and publicly traded companies with greater access to capital, expansion obligations to shareholders, and established banking relationships, are less vulnerable to higher costs.

For now, it seems, this is still a market that is favorable to landlords. The question is for how long—and what happens next? What happens if demand keeps slowing and new supply stops coming online? Will we see more local and regional tenants slowly vacate under the pressure of rising costs? And with only so many nationals growing steadily, at some point the leverage will shift back to the tenant. For developers like WMG that are looking to be thoughtful and strategic in creating appealing tenant mixes, satisfying the demands of both balance sheets and community appeal will continue to be something of a moving target. Against the backdrop of shifting consumer preferences and priorities and the inevitable ebb and flow of market trends and macroeconomic forces, the ability to navigate the contours of an evolving leasing landscape will remain a skill that elevates successful developers above the competition.