August 03, 2015

New Malls to Drive Further Retail Growth

By Lance Allan
– The Daily News –

The Metro Memphis retail landscape is about to see major change. Over the next two years, three open-air shopping malls of various sizes and styles will open for business in Shelby and DeSoto counties.

The new malls will deliver more than 2 million square feet of retail space to the market. Once the centers are completed, it might seem that the region couldn’t handle much more retail growth.

Development potential: But commercial real estate professionals said the market’s potential is strong for the foreseeable future, as the new malls will add opportunities for big-box and small retail growth in their expanding submarkets.

A precursor to the trend was seen in 2004 when, according to CB Richard Ellis 1.3 million square feet of new inventory was added. Much of that was big-box development, such as Kohl’s Department Store, Target, Home Depot and Wal-Mart, which added stores throughout Shelby and DeSoto counties.

Supporting space: While it’s probably safe to expect a slowdown in development of mega-retail centers following delivery of the three open air malls – The Avenue Carriage Crossing in Collierville and Southaven Towne Center and DeSoto Pointe in Southaven – an overall slowdown is not seen on the horizon.

“What will keep going is all of the support stuff that clusters around the main retail base,” said Joel Fulmer of Boyle Investment Co., president of the Memphis Area Association of Realtors’ Commercial Council. “The area right around Wolfchase Galleria is a good example. You have Carriage Crossing going in, and then for the next three to five years, you have the smaller retail clusters that pop up in support of it that capitalize off the traffic that those draw. You have little carpet stores and restaurants, the people that are not going to go in the middle of the big development, but want to feed off some of the traffic that will be drawn to the area.”

Neighborhood retail: While the amount of retail space in the market saw continued growth last year, that new space was being filled. According to a CBRE fourth quarter Retail Market View, the overall vacancy rate declined to 9.1 percent during the quarter, its lowest level in five quarters.

New retail development in the next few years won’t be centered solely around large scale retail development, though. Some of those “little carpet stores and restaurants” Fulmer referred to will open in smaller neighborhood centers.

“That’s the stuff we’re going to continue to see,” said Danny Buring, broker with The Shopping Center Group Inc. “You’re going to see more and more people try to get into the business. I’ve always said Wal-Mart, Kroger, Target and Lowe’s all own their own real estate, so where does that put the little guy? It puts them across the street, next door in small centers, so you’re going to see more of it.”

Attracting newcomers: One factor that could lead to a cool-off in retail development is over saturation.

“It’s like picking teams for these kinds of things,” Fulmer said. “They’re all going to get these majors lined up, then there’s going to be a little bit of a cooling-off period while the dust settles. You can only put so much out there at one time.”

And that could be an issue facing developments at Germantown and Bellevue parkways, just south of Interstate 40.

“There are only so many players, and most of the majors are already in place up there or they are spoken for,” Fulmer said. “There are not as many people to pick from for that general area as there were five years ago. You’ve got 20 or 25 pretty good sized retailers, and virtually every one of them is already represented in that Germantown and I-40 market. For there to be much more new activity in that area, it’s almost going to have to involve new people coming into this market, rather than just people that are already here expanding there. That’s a lot harder and a lot slower than it is pulling Dillard’s to open up a new store.”

Interest rates: The fact that interest rates are expected to see small increases over the next year or two could play a role in whether some retail developments go forward.

“It will have an impact on the developers, but it’s not going to have as much an impact.” Buring said. “Big picture, it’s going to have an impact of 10 cents a foot to the retailer. As far as the developer, it’s going to be nickels and dimes.”

Fulmer believes projects won’t halt as rates inch upward.

“I don’t think interest rates will jump up very fast,” Fulmer said. “We’ve always been able to make deals work until rates got up around the 10, 12 percent area. Then they start getting to be more difficult, and we’ve got a lot of room between here and there. So I don’t think interest rates are going to be much of an inhibitor over the next two to three years.”