Rising rental costs, higher competition for less available space could make it more difficult to expand stores for the time being
ATLANTA — Have the best days come and gone for new furniture store development?
That of course depends on the market you’re in and how long you’ve been planning a new store location.
But one real estate expert believes that the market already has begun to shift coming out of the pandemic.
Ben Haverty, vice president of Furniture Industry Service at Colliers, has been watching the market for some time, all the while collecting data on activity in various major metro markets.
In an interview with Home News Now, he referred to some of the dynamics now happening in the market. For one, retail vacancies are shrinking rapidly. Secondly, rents are increasing, which is driving up the per square footage costs to operate a business.
According to Colliers, average retail lease rates in the U.S. have steadily risen from $21.93 per square foot in the fourth quarter of 2020 to $22.62 in the fourth quarter of 2021, For a 60,000-square foot building, that adds up to more than $41,000 in annual rental expenses.
Also, consumer demand is said to be slowing just as interest rates are starting to rise, which in turn makes it more expensive to purchase a new home, an obvious driver of home furnishings sales.
“So if you are a furniture retailer and want to expand, it’s going to be slower than you want it to be and it’s going to be more expensive than you want it to be,” he said of the current business climate. “Those are going to be issues that affect the rate of expansion, and they are going to affect the cost of expansion.”
In a further indication that retail space remains at a premium, Colliers research shows that the national retail vacancy rate dropped 10 basis points during the fourth quarter of 2021 alone, standing at 4.6%. Vacancy rates in the top 10 metro markets ranged from a low of 2.8% for Boston to 6% for the Chicago market.
Haverty said the environment has changed since the height of the pandemic, where high consumer demand and available space made the timing right for many retail expansions.
“If you were a retailer and a year and a half ago, you said, ‘I want to go to a new market,’ there were five big boxes to pick from,” he said, adding that many retailers also had the upper hand when it came time to negotiating a price. “Those days are over. If you can find a location, the landlord is going to price it and the rent is going to be above what it was pre-pandemic. And if you are entering a new market, you also will want to find warehouse space, and you are now competing with every major retailer and distributor.”
The good news is that the housing market remains somewhat brisk as people are rushing to get loans before rates go up too much – perhaps at least several more times between now and year end.
Retailers also have an opportunity to scale their footprint in order to save costs on rents and labor.
Haverty cited the example a retailer such as Target moving into a college town where it might build a 30,000-square foot store versus a more typical 130,000-square-foot location. Some stores opening in small towns are as small as 12,000-square feet, one-tenth of the size or less of a typical Target store.
Kohl’s is another example. Its stores are about 80,000 square feet on average. However, it also has smaller locations in the 35,000-to 55,000-square-foot range, again tailoring its footprint and merchandise mix to the perceived needs of a given market.
“A smaller footprint is less expensive to build as the land is cheaper, the building is cheaper and the occupancy costs are cheaper,” Haverty noted. “There also are fewer employees and you may have higher sales per square foot. That is one way some retailers are addressing the rising cost of real estate. They just decide to have a smaller footprint and keep costs down with a smaller building.”
While the figures are not in yet for this year, he also sees continued development of retail space above and beyond the 21.3 million square feet of space delivered around the country last year. As of the end of last year, some 51 million square feet of retail space was under construction including – in order – major metro areas of Houston, 3.9 million square feet; Miami, 3.5 million square feet; Dallas-Fort Worth, 3.2 million; New York, 3 million and Atlanta 2.2 million.
The mix, he said, does not include major shopping malls, but rather power centers and open air centers and mixed-use facilities.
Thus the news is not all bad as retail construction continues. But so too could competition for available space, leaving many furniture retailers having to scramble in what could be described as a seller’s market.
“Most every retailer had a great 2021,” Haverty said. “They cut their expenses, business increased and they are flush with cash. They want to grow their business, but so does everyone else. You have a lot of players chasing fewer real estate opportunities.”