Retail shifting away from suburban big-box stores

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CHARLOTTE – Retail developers in the early 2000s were on a mission, according to Darrell Palasciano, a broker with The Shopping Center Group: Who could build the most and biggest box stores in power centers?

Now those power centers are at the bottom of developers’ lists when it comes to retail space under construction in the area.

“They were building shopping centers in green fields because they could,” said Palasciano, who works in the Charlotte office of the retail-focused commercial real estate firm. “They ended up with a lot of shopping centers that didn’t make a lot of sense. Ten years ago they were being foolish.”

The recession changed that and made retailers a lot more cautious about where they locate, which has drawn stores away from suburban sprawl and into urban-infill locations.

Palasciano says the focus on smaller, well-positioned stores is smart for the industry, which he said had gone astray of its roots by putting up so many power centers, which are massive retail developments with multiple big-box anchors, usually in the suburbs.

“I think the trend that is encouraging is that retailers and restaurants are getting back to what’s important and, from a real estate perspective, they’re getting better locations, infill locations,” Palasciano said. “We’re getting back to the core fundamentals that have always been there: very good, easy locations close to visibility. I think that’s what we got away from in the boom time, abandoning our core fundamentals.”

Data from a fourth quarter 2013 retail market analysis, the Karnes Report, backs up this assertion. Despite having rents higher than all shopping-center types except regional centers – malls, mostly – the power centers category has the least amount of space under construction and the second-least amount of space proposed in the Charlotte area. The locally based Karnes Co. provides analysis of commercial real estate markets.

Only 10,600 square feet of space is under construction in power centers in the Charlotte area, compared to 71,303 square feet in unanchored specialty centers; 140,820 feet in neighborhood centers; 149,376 feet in community centers; and 350,000 feet in regional centers, according to the Karnes Report.

Of retail space proposed in the area, power centers account for almost 1.9 million square feet of space, less than neighborhood centers, 2 million feet; regional centers, 2.9 million feet; and community centers, 3.4 million feet proposed, the report shows. Only specialty centers, with 1.5 million square feet proposed, had less. Proposed space means projects have been planned, but won’t necessarily be built.

Andrew Jenkins, president of Karnes, said retailers have been much less aggressive on power centers over the last few years.

“There’s just not a lot of what you think of as power centers coming online,” he said. “When things were really explosive in supply, like in 2009 when 4 million square feet were under construction, they wanted these power centers. They’re not as aggressive as they have been.”

Part of the reason suburban power centers have lost some of their allure for developers is because traditional retailers just don’t need as much space as they once did.

Palasciano said the Internet has caused many retailers to rethink their brick and mortar strategies. For example, a clothing retailer that traditionally would have carried 15 colors of the same shirt may now carry only five colors in the store and offer same-day delivery on all colors from its website. That reduction in inventory allows them to take smaller space, Palasciano said.

“They’re going to smaller locations, better locations, more efficient locations,” he said. “Retailers are starting to pay more for location. Their sales don’t go down as they get smaller. Physically, they need less space so theoretically they can pay more.”

He likened the retail transition to selling a 5,000-square-foot house in SouthPark for $2 million and buying a smaller condominium in Uptown for the same price. You’re in a better location, so you pay more for the space, he said.

The moving-house analogy is also appropriate for retailers because they’re following the housing shift recently seen in Charlotte. Over the last few years, multifamily developers have been heavily focused in urban-infill development, and the retail is following those rooftops.

“Ten years ago if you mentioned building a Publix with structured parking, people would have thought you were crazy,” Palasciano said of the Publix infill development that’s under construction in South End. “But that’s where people are living now.

“Just lining up a bunch of boxes in a power center won’t really work anymore.”