Located at the intersection of Maiden Choice Lane and Westland Boulevard, the Arbutus Shopping Center was a solid but not extraordinary retail property. The 40-year-old, nearly 88,000-square-foot center is anchored by a Weis Markets grocery store with co-tenants such as Walgreens, Dollar Tree, Advance Auto Parts, Truist Bank and several small, local businesses.
Yet when the center went up for sale this summer, the listing spurred extraordinary results.
When the Arbutus Shopping Center went up for sale this summer, the listing spurred extraordinary results and sold within 97 percent of the asking price. Image courtesy of KLNB.
“We ran an abbreviated marketing process due to an impending loan maturity,” said Chris Burnham, Principal, Capital Markets at KLNB, who represented the seller. “After our two-week marketing process, we received nine offers and the competition was so fierce that we were able to select a buyer that started their due diligence immediately. We subsequently closed the deal prior to the loan maturity date and within 97 percent of our asking price.”
Regardless of whatever challenges or uncertainties arise from interest rates, construction costs, inflation levels, economic forecasts, market shifts or election year jitters, the retail sector is chugging along at a robust pace. In October, the retail vacancy rate nationwide dropped to a 20-year low (4.1 percent) and the Consumer Confidence Index hit a six-month high (70.5).
Those and other strong fundamentals are driving vigorous investor interest in retail properties and supporting a competitive leasing market.
“The most interesting dynamic in the retail investment sales market right now is the amount of demand from investors for multi-tenant retail shopping centers of all shapes and sizes,” Burnham said.
Over the past year, investors have purchased multiple shopping centers in central Maryland. Arundel Village Plaza on Ritchie Highway sold for $9 million — $2.5 million more than its 2014 sales price. Edgewood Plaza Shopping Center in Harford County sold for $10.35 million — $3.5 million above its 2005 sales price. Other sales included Foxtail Center in Timonium for $15.1 million and Hawthorne Plaza in Middle River for $6.4 million.
Strong consumer spending is driving up demand for retail space in locations ranging from typical strip centers to new, mixed-use developments. Image courtesy of Greenebaum Enterprises.
Even with the volatile debt market, sustained higher interest rates and relatively compressed capitalization rates, “we often are selling retail assets that allow for an investor to still achieve positive leverage, which is hard to find in other product types today,” Burnham said. “Retail is performing exceptionally well right now compared to some other asset classes.” Since 2021, Continental Realty Corporation has purchased more than $700 million worth of open-air shopping centers across the U.S.
Earlier this year, Continental bought two centers in Virginia (Gayton Crossing in Richmond and Creekside Station in Winchester) and sold the Center at Hagerstown, a 292,000-square-foot regional shopping center that the company had acquired in 2019. “Our team had done a great job building value in that property,” said Josh Dinstein, Senior Vice President, Acquisitions.
Continental had sold nine of the center’s 10 free standing pad sites for a total of $16.1 million and a blended cap rate of 5.4 percent. Continental also raised the center’s occupancy from 79 percent to 97 percent and added some top-tier retailers. When the center sold in August, its tenants included Burlington, Crunch Fitness, Home Goods, Marshalls, PetSmart, Party City and about a dozen other retailers and restaurants. Continental calculated its total exit value from the Center at Hagerstown at $52.4 million. The company had purchased the property in 2019 for $23.5 million.
Dinstein who is continuing to look for retail properties to acquire, expects the sector’s fundamentals to remain strong.
“The U.S. economy is two-thirds driven by consumer spending and the consumer is very healthy,” he said. “Look at their savings rate, their credit card debt.People feel wealthy in terms of their houses and stock portfolio or 401k. All of that is spurring demand from the consumer.”
That demand is being met with expanding and new retail concepts.
“The type of tenant you are seeing in retail centers today is totally different than you saw even five years ago,” Dinstein said.
At the end of Light Street, Lee & Associates is seeking to fill a former slaughter house with a perfect mix of retailers to serve the South Federal Hill market. Image courtesy of Lee & Associates.
An array of services — from dentists, chiropractors and veterinarians to music schools, new fitness concepts and cryotherapy spas — has signed leases in strip retail centers. And then there is the stunning proliferation of food outlets.
“Nearly three out of every four retail lease deals are food-focused,” said Tom Fidler, Executive Vice President and Principal at MacKenzie Retail LLC. “In particular, quick service restaurants have dominated over 70 percent of all retail leasing in the past two years.”
Many workers have experienced a post-Covid time crunch and have sought to ease that with more purchased meals, Fidler said. Restauranteurs and retail landlords have responded to that demand by opening a bigger variety of internationally inspired restaurants, expanding many comfort food chains (such as ‘hot chicken’ take-outs), and reconfiguring properties to provide 10-minute pickup parking spots and places for food delivery vehicles to stop.
For companies looking to lease retail space, the result is “a lack of product inventory and a dramatic increase in demand,” Fidler said. “In my 31 years doing retail real estate in the greater Baltimore marketplace, I have never seen a time when dealmaking is so complicated due to available real estate and outpaced demand.” Consequently, demand has spiked for retail spaces in areas that “are seeing new rooftops, new job creation,” such as Maple Lawn and Harbor Point, Fidler said. At the same time, formerly run-of-the-mill properties can now command elevated rents and lease negotiations have become more complex.
“If you have a location near a signalized intersection on York Road between Towson and Hunt Valley or on Reisterstown Road in Owings Mills, it is A-plus real estate and it is going to pay A-plus rents,” Fidler said.
Furthermore, many landlords are being more selective about who they place in their retail centers in order to secure strong tenants and attractive retail mixes.
“Landlords are doing more due diligence about brands, operations, sales history, qualifications, financials,” Fidler said. “Sophisticated landlords are asking questions about operating expenses, where a tenant’s capital is coming from, how they plan to handle hours of operation and delivery orders. They are digging more into what a business thinks it can do versus what a landlord feels that business should do, and then they are trying to find collaborative deal structures so that a lease makes sense.”
That space shortage has inspired new interest, new opportunities and a few creative new uses for some disused retail sites.
Convinced of the strong and lasting fundamentals of the retail market, Continental Realty has purchased more than $700 million of open-air shopping centers since 2021. Photo of Creekside Station in Winchester, Va. courtesy of Continental Realty.
Consolidation in the pharmacy industry has created opportunities for dollar store chains to expand, said Glenn Ulick, Senior Vice President, Brokerage at Lee & Associates | Maryland. At any given time, Lee & Associates | Maryland is juggling eight to 12 leasing deals for Dollar General.
Junior boxes, such as former K-mart stores, and other oddly sized or located retail sites are finding new use as pickleball courts or medical offices, said Mark Mueller, Senior Vice President at Lee & Associates | Maryland. “A good example is in Hunt Valley where we had a 22,000-square-foot day spa that closed. That space was just too big for a lot of traditional uses.”
So instead, the space was retrofitted to become a Mercy Medical physicians’ office which now sits adjacent to a Dunkin Donuts, a nail salon, an emergency veterinarian clinic and a Dutch Market.
The robust retail sector has also spurred a few developments in underserved areas. Lee and Associates is currently leasing a retail conversion of a historic industrial site on the first block of Light Street.
“It is 38,000 square feet and it was built in the 1800s as a slaughter house,” Ulick said. “It is a phenomenal area on the south end of Federal Hill, called Riverside.
Within an eighth of a mile, there are six, brand new, midrise, upscale apartment buildings and you have a population that mostly telecommutes. So, in this area that has almost no retail now, the owner is repositioning this building to have a number of restaurant spaces plus some fitness facilities.”