Power centers, lifestyle centers, strip malls, freestanding pads all encompass retail with existing properties, ground leases and new construction. Even after the pandemic convinced everyone that brick-and-mortar shopping was done for, people still go shopping. There’s something about browsing tangible goods, mingling with other shoppers, meeting a friend for coffee, and going home with a purchase rather than waiting for it. It’s the whole experience.
That experience has changed. Some retailers now use their shops as showrooms. Shopping trips can now include golf, karaoke, a five-star meal, and live music. Brick-and-mortar is staging a comeback, adding experiences that can’t be bought online to entice shoppers.
Trends in Retail
The retail market in Northern Nevada is robust. Vacancy rate for existing space is very low, trending at 4 percent, and there’s a lot of activity in the second-gen space, or existing retail space.
“The reason for that is the new construction we’re seeing, the rents are very expensive, so the national tenants, tenants with a lot of credit, a lot of money, they can afford the higher rents. The mom and pop or regional tenants really have to focus on existing improvements inside of second-gen space,” said Shawn Smith, executive VP, Colliers Reno.
The market is vibrant enough that existing restaurants with improvements already made are getting snapped up fast – because new ones cost a lot. Anything with a drive-through already attached goes fast, too. Consumers have embraced the convenience of drive-through.
“Rents are up, too, because of the low vacancy,” said Smith. “They’re running in the $2.25 per square foot a month on existing construction and then pushing anywhere from $4 to $4.50 on new construction.” Drive-through restaurant on a freestanding pad in a shopping center in Northern Nevada? That’s probably going to run $5 or $6 per square foot.
It’s also one of the fastest-growing segments in retail. “Freestanding pads the credit tenants design/build [are] still very vibrant and that continues to work very strongly in the market,” said Tim Deters, president and CEO, TRU Development. “Those are the Starbucks, fast food, banks, the drive-through places, long-term, lease-back, design-build scenarios. They’re popular in the marketplace as long as they’re a credit tenant – Starbucks, freestanding fast food, and freestanding drive-through concepts. There’s a lot of demand for them both on the tenant expansion side and on the investment side on the backend,” Deters said.
“Quick service restaurants and drive-through concepts have been expanding rapidly across many markets,” said Justin Noin, senior vice president, Acquisitions and Development, McKenzie Properties Management, Inc. “From our perspective as a developer, we are seeing the strongest demand from service-oriented tenants such as medical, fitness, and personal services that provide convenience and consistent traffic for neighborhood retail centers.”
Big-box projects have slowed. “In our market, the need arises as the MSA expands, but they are less common than they once were,” said Noin. “Many developers today focus on smaller multi-tenant retail centers anchored by restaurants, services, and mid-sized retailers. In some cases, existing big-box spaces are also being developed or divided to accommodate multiple tenants.”
In Southern Nevada, “power centers have really slowed down. You see a lot more smaller retail developments, strip centers, single tenant assets,” said Deters.
Deters said the industry is driven by interest rates on the frontend—did we borrow the right money? Is the cost of capital low enough for this to make sense? Then on the backend, the cap rates, “The interest rates and cap rates environment go hand in hand so that really drives a lot of new development.”
There’s a lot of movement toward smaller strip retail centers, where developers can be flexible with sizes. “Let’s say I’ve got a 20,000 square foot strip retail center, I can move walls and accommodate different uses, different sizes,” Deters said.
Retail is growing across many sectors, with smaller centers able to pivot faster. “Retail moves so much faster,” Deters said. “Businesses are in and out, new restaurant concepts, new retailers. They seem to come and go much quicker, a much more volatile industry from my perspective. That’s why I go back to the product type of smaller retail centers where I can be more flexible, because I’m going to have to be able to adjust to market changes quickly.”
Another trend for new construction right now is that landlords prefer a ground lease. “It’s becoming more prevalent in our market,” said Smith. “The tenant actually leases the dirt and then they build their own building. It takes away the risk of the landlord building for them.”
It also means the tenant owns their own building, right? “They do for 40 years on the terms of the lease, and then it actually reverts back to the landlord,” said Smith. That’s because a commercial asset can depreciate for 39 years, so by the time the organization or company owning it has depreciated it, it’s cheaper to return it to the landlord than pay a recapture tax; 25 percent to take the building back.
It’s All About the Experience
Experiential retail is something fun that came out of the pandemic. When it was safe to go shopping again, consumers were lured back by the siren call of experiences.
The idea is simple: convince shoppers to come shop and stay awhile. Beyond heading out to buy a product and going back home, experiential retail invites shoppers to stay a spell—and spend a bit.
Experiential retail gives shoppers a reason to physically go brick and mortar, visiting actual locations. Beyond simply shopping, it’s interactive, social, entertaining, anything that couldn’t be replicated online.
“It’s retail starting to evolve, to get away from chilly transactional spaces, to more actual destinations where people can interact with a brand, spend some time in a store, socialize, anything to get foot traffic inside the physical store,” said Smith. “Look at places around town, you’ll see more concepts like Round1 [Bowling & Arcade] and Dave & Buster’s [arcade, sports bar, restaurant]. They want you to stay a long time, and even a place like Scheels is totally interactive. With shooting galleries, you can shoot a bow and arrow, there’s a candy shop, and golf simulators. They want you to come in and stay there and spend as much money as possible.”
Other examples in Northern Nevada might include Rancharrah, a mixed-use development with its spa and bocce ball course. Shopping centers that support farmers markets all summer to bring people into their parking lots are another example.
“I like to create my experiential retail from a landlord standpoint,” said Deters. “I try in my retail centers to create outdoor seating areas, mixed-use environments where retail is intertwined with pedestrian and vehicular connectivity to apartments or residential components, so they work with one another and feed off each other.”
In Southern Nevada, one of the newest lifestyle centers is making the most of existing property. Located in the heart of Green Valley Ranch in Henderson, The Cliff is being created around 100,000 square feet of underutilized office campus, rebuilt into a landscaped center with shopping, dining, entertainment. The project is meant to be an anti-mall, with lots of outdoor attractions and dining, upscale shopping and food, a full fitness facility, class A office space, 237 luxury residences, and live music events. Fifteen minutes from The Strip, 10 minutes from the airport, The Cliff is being built as a destination for residents to connect and enjoy. The project is being developed by CAST Capital Partners and Partners Capital, Inc.
Retail Follows Rooftops
There are new projects on the horizon, though maybe not as many as there once were.
In Northern Nevada, Kiley Ranch Marketplace, a 47-acre project in Spanish Springs, will be anchored by a grocery store and a department store, and have freestanding pads and drive-through QSR – quick service restaurants — sit-down restaurants, fitness, healthcare, medical, and dental offices. “The typical lineup at a power center,” said Smith. “A lot of pads will be ground leases.”
What’s the difference between a power center, a lifestyle center, and a mall? Power centers come with two or more big box retailers for anchors, like Reno’s Firecreek Crossing that houses a Sam’s Club, Walmart, Ross, TJ Maxx. Lifestyle centers usually run 150,000 to 500,000 square feet of upscale apparel, dining and entertainment experiences on landscaped, Main Street-like sites. Power centers often have grocery stores and serve a five to 10-mile radius. Lifestyle centers expect shoppers to come to them. Malls are malls.
New or Used
Unless you’re a sophisticated, well-heeled developer in today’s market, you’re likely looking for more existing product, Smith said. It takes a lot of money and dedication to build from the ground up and it’s a huge process: finding the property, getting city approval, finding anchor stores, dealing with CCRs (covenants, conditions, and restrictions), developing the center and working with tenants.
“I haven’t seen a lot of ground-up projects for a while in Reno,” Smith said.
But projects building on existing properties are popping up everywhere. The Kiley Ranch center is retail following rooftops, created to serve residents of a specific area. An In-N-Out Burger is going in on Plumb and Kietzke. The shopping center at Fifth and Keystone was built on infill. There’s a new development going in on I-80 and Robb Drive, an 80-acre residential and commercial project that’s just breaking ground. There’s a project on South Virginia that will be big-box anchored.
There’s some disagreement about big-box projects in today’s market. They’re either expected or they’re not quite as common anymore. Kiley Ranch is a big-box project, the South Virginia center has a big-box component, and the Robb Drive project will be anchored with them.
Big box products include grocery stores, and the grocery world is changing. “The grocery market is tricky. I think the gourmet grocery market is dominated by Whole Foods, but I think the others are really struggling, the Sprouts of the world,” said Deters. “There’s been a lot of competition that’s been introduced in the grocery market over the last 10 years. It’s starting to settle in, and only the strong are going to survive. We’re going to see some of these gourmet groceries and normal grocery chains either being purchased by some of the larger and or continuing consolidation in that area.”
Big box projects are still being developed, but much more select and at a slower pace, said Deters. A Costco power center will still happen with a lot of retail pads out front and some minor boxes of 10- to 15,000 square feet to support it. Costco puts a lot of pressure on other retailers, and some of them, like Target, are struggling. Target isn’t expanding like it was. Similarly, Whole Foods continues to expand where other gourmet grocers are pulling back because they can’t compete.
“Overall, retail is trying to come out of a couple year slow period. As they want to expand they’re going to be looking for concessions. From a development standpoint, the flip side of that is you’re dealing with an extremely high cost market right now, land costs, construction costs. It puts a lot of pressure on making the right lease concession or concessions overall, transactions with your bigger boxes. Once again, [that] puts a stranglehold on new development,” said Deters.
The marketplace is tough right now. Deters expects better conditions to develop over the next year. “I think costs are stabilizing. They’re not coming down yet, but it’s all a game of costs and rent, so we always have to keep that in mind.”
The Amazon Effect
For a while, especially during COVID when e-commerce surged and Amazon led the way, it felt like Amazon had won retail.
It has had an effect, certainly. Shoppers today expect Amazon speed and convenience no matter where they are.
“From a developer’s perspective, the growth of e-commerce has changed how retail centers are designed and leased,” said Noin. “We place a greater emphasis on restaurants, services, and experiential uses that draw consistent traffic and are less impacted by online shopping.”
The very convenience of Amazon reinforces for developers the importance of creating convenient, service-oriented retail developments in the right locations. Some retailers are using their physical shops as a showroom where customers can experience a tangible product before ordering it online.
“Amazon has put pressure on retailers to be on top of their game,” said Deters. “Especially with people looking for convenience. But I think the retail environment has absorbed it. A couple years back I don’t know if I could say that. But all the retailers were kind of holding on, grasping, what’s next? Is Amazon going to take over the retail world? That didn’t really happen. It had an impact on it, but it was like throwing a stone into calm water—the ripple effect happened and now it’s calmed back down. Everybody is used to dealing with Amazon, they’ve learned how to work with it or work around it. They’ve learned to adapt with and work hand in hand with Amazon. So it’s not always a deterrent.”
Rather, Amazon has made delivery and logistics options more efficient for many other retailers who want to compete. It forced retailers to get better at what they’re doing.
“From a retailer’s standpoint, even how you get product to folks has changed dramatically with Amazon, so there’s benefits to that too, forcing retailers to become much more nimble. I think with the right implementation, Amazon can be a very valuable asset to a lot of retailers,” Deters said.
