Falling Retail Rents Spur More Store Openings

Following the decline in retail rents since the recession, a number of retailers are reporting that they plan to step up store openings in the next couple of years to take advantage of the more favorable pricing.

According to CoStar Group analysis, retailers have no shortage of availabilities in their choice of centers as retail vacancy rates remain in the high teens. And tenants are wielding their upper hand by playing one landlord against another to obtain favorable terms. Even centers that have avoided the growing rash of vacancies may be harvesting fewer dollars in rents, as more retail tenants press landlords for concessions and as more leases are rolling to lower market rates.

The trend is particularly true for malls and lifestyle centers. Per CoStar Group data, landlords have conceded the most ground at these beleaguered property types. Cumulative rent losses have run 13.6% and 12.1% for malls and lifestyle centers respectively through the third quarter of 2010.

As a result, department store chains such as Menomonee Falls, WI-based Kohl’s are stepping up their new store activity. Kohl’s opened 21 new stores this past quarter for a total of 30 stores this year and said it is looking to up that to 40 stores in 2011.

“I think the reason we increased to 40 was quite honestly mainly due to real estate cost favorability,” Wes McDonald, CFO of Kohl’s in the company’s third quarter earnings conference call. “So deals got a lot better than we’ve been working for a while.”

“Whether or not that continues is really going to be a function of the real estate costs remaining low,” McDonald added. “If they start to remain high and our sales estimates were still sort of sluggish, you might see us going back to 30 but for now 40 for next year and we’ll see how 2012 goes.”

Of the 40 stores Kohl’s expects to open next year, 12 are takeovers of vacated space some Mervyn’s, some Wal-Marts and some Lowe’s, McDonald said. Of its new openings next year, 10 stores are planned to open in the spring season and 30 in the fall.

hhgregg, a specialty retailer of consumer electronics and home appliances based in Indianapolis, has opened four stores in the past month and plans to step up new store activity in fiscal 2012.

“Due to our successful new market launches in the Mid-Atlantic market and the continued availability of quality real estate at reasonable rental rates, the company believes the time to expand aggressively remains intact,” the company announced in its quarterly operating results. “As a result, the company expects to open 35 to 45 stores in fiscal 2012.”

The company opened 12 new stores in the quarter ended Sept. 30 (the second of its 2011 fiscal year) and remains on track to open a total of 43 new stores in FY 2011.

The majority of its projected openings are expected to be in the Miami and Pittsburgh markets and a few other select markets. This month, hhgregg opened a new store in Erie, PA (north of Pittsburgh) and Manassas, VA, (in the Washington, DC, metro area). Late last month, new stores were opened in Naples and Ft. Myers, FL.

Dick’s Sporting Goods Inc. based in Pittsburgh also said it is taking advantage of more favorable market conditions.

“We continue to work with our landlords on lease expirations and continue to try to renegotiate those in those locations where we want to continue to be,” said Joseph H. Schmidt, president and COO. “We’re also looking at this opportunity to potentially relocate some stores from existing real estate to maybe some a better location in the marketplace. We continue to find some opportunities to lower our lengths as we work through this.”

It is not an across-the-board trend at this point, however. Retailers tied to the home improvement market continue to reduce costs as the housing markets continue to slide.

Carol Tomé, CFO and executive vice president, corporate services for Home Depot, reported that her company is continuing to drive productivity in its existing stores. It has opened only seven stores this year and will maybe open 10 next year.

Robert Niblock, chairman and CEO of Lowe’s, said in his company’s third quarter earnings conference call that, “we don’t expect consistent improvement in core demand until the fundamentals of the labor and housing markets improve. However, we are prepared to operate effectively in a slow growth environment, focusing on operational efficiency and prudent expense management. We are ready to respond if demand is better or worse than expected.”(m. heschmeyer-costar)