Market Report_Q1 2023 Retail

Q1 23

market overview

As of the close of Q1 2023, overall shopping center vacancy in the Sacramento region stood at 8.0%. This is up from the 7.6% rate recorded at the close of 2022, as well as the 7.3% mark posted exactly one year ago. The market experienced -228,000 square feet (SF) of negative net absorption (occupancy) declines over the first three months of 2023. There are 14 distinct submarkets within the metropolitan area; 12 of those posted negative net absorption in Q1, though in eight of those trade areas the declines in occupancy were 15,000 square feet or less—in other words, roughly the typical footprint of a single drugstore.

This trend of increased vacancy played out for almost all shopping center types in Q1. Community/neighborhood centers, which account for 38.4 million square feet (MSF) of the region’s 66.2 MSF inventory (57.9%), experienced 140,000 SF of space givebacks which drove vacancy up from 7.3% to 7.7%. Power centers, which account for 11.1 MSF of Sacramento’s shopping center inventory (16.7%) recorded -59,000 square feet (SF) of negative net absorption. Vacancy for this shopping center type increased from 5.8% to 6.4%. Meanwhile, the vacancy rate for unanchored strip centers climbed from 7.5% to 7.8% and the long beleaguered regional and super regional mall sector saw vacancy increase from 15.4% to 15.9%. Only Sacramento’s lifestyle centers saw modest growth in Q1; vacancy fell from 6.4% to 6.1% in what was the fourth consecutive quarter of occupancy growth for this shopping center type.

market outlook

Most of this past quarter’s occupancy losses came from either a select few big boxes being returned to market or what we would see as typical tenant churn (i.e. small shop or restaurant space going vacant). The latter trend is far less of a concern, especially when it comes to Class A or B+ shopping centers—our brokers continue to report strong tenant demand for quality space. This is not to say that the same does not exist for larger boxes; especially for available spaces below the 40,000 to 50,000 SF mark—so long as they are within higher quality centers. Vacancy for retail remains largely concentrated in Class B- or Class C product or in spaces above that 50,000 SF threshold. Most larger space users have been downsizing store footprints and the market for second-generation mega box space remains soft.

Some of the recent space givebacks in the region have come from the handful of retail bankruptcies that have occurred over the first three months of the year. For example, the February bankruptcy of Tuesday Morning resulted in three local area stores being closed: Citrus Heights, Folsom and Roseville. For the Roseville market, historically the Sacramento region’s most sought after trade area, this was the difference between being in the black or being in the red in terms of occupancy growth in Q1. Meanwhile, though Bed, Bath & Beyond (BB&B) managed to escape Q1 without a bankruptcy filing, it is increasingly looking as if the beleaguered home furnishings retailer may be coming to the end of its financial rope.

BB&B announced plans to close 150 stores and cut 20% of its workforce late last year but has since added an additional 87 stores to that list. They abruptly shut down all 50 of their health and beauty concept Harmon in February, as well as a handful of Buybuy Baby

locations (which they reportedly shopping to raise capital). While BB&B raised $500 million in incremental financing last September, they had burned through that capital by March as suppliers increasingly refused to extend credit to keep shelves stocked. It is unclear if the 50-yearold concept may be able to survive via a Chapter 11 filing or end up being liquidated. Either way, expect a significant portion—if not all--of their 596 stores (as of March 2023) to be returned to market. Locally, BB&B’s Natomas & Folsom stores went dark in Q1, which was just enough to tilt that submarket into modestly negative growth territory. The Natomas trade area also lost its Barnes & Noble store this quarter, though we should note that the bookseller has returned to national growth mode for the first time in 15 years.

As challenging as this news may sound to landlords, we expect vacated BB&B space to re-lease at a relatively brisk pace—much more so than the lease up times we have seen in the past with other big box tenants like Circuit City, Linens N’Things or Toys R Us. The reason is simple; demand for box space in the 30,000 to 40,000 SF range is much higher today than it was when those chains liquidated. Additionally, like Toys R’Us, most of BB&B’s real estate is in highly desirable Class A shopping centers.

Our brokers report several major big box tenants that are already on standby, hoping to procure BB&B locations in the increasingly likely chance of bankruptcy. Off-price apparel users would be the likely re-tenanting option; Marshall’s, Ross, T.J. Maxx are all in expansion mode. The same holds true for Burlington, which is increasingly moving away from its older, larger format footprint (sometimes as large as 80,000 SF) towards a smaller template in the 25,000 to 35,000 SF range. Additionally, Kohl’s also remains in growth mode, they also are experimenting with smaller format stores in the 30,000 to 40,000 SF range that will enable them entry to smaller markets, as well as create some infill possibilities for them in existing trade areas. All these retailers could be in the mix for backfilling BB&B locations while smaller format grocery players may also be in play. Indeed, local grocery favorites Raley’s and Nugget have both been active with planned new stores in the pipeline, while Sprouts and a number of other national chains are also active in the marketplace.

Regardless, a BB&B bankruptcy will likely translate into more closures locally; they currently operate two stores within the Sacramento region. The same is likely with the mid-April bankruptcy filing of David’s Bridal. This is their second bankruptcy since 2019 and early court filings indicate that the chain will be completely liquidated unless a buyer can be found, which may be difficult given overall economic conditions. The chain has roughly 291 stores in North America with four in the Sacramento region.

Late last year Barnes & Noble announced plans to open as many as 30 new stores nationally this year. Given that books and media retailers were among the most disrupted of all retail categories, the fact that Barnes & Noble has not only stabilized but is returning to growth mode is noteworthy.

Roughly 80% of the nation’s books are now sold online. The last 20 years for booksellers (at least those that have survived) have been about finding the right balance between boosting their online presence while radically reducing their store fleets all while eCommerce was continuing to gather greater market share each year. The question all along was just how deep would eCommerce’s penetration of different retail categories be? For books and a number of other categories already disrupted by online sales, the growth trajectory for eCommerce is finally normalizing. The worst of the disruption may be behind us for most retail categories.

Perhaps a more telling metric for the region is its total availability rate. Total availability usually is substantially above what is technically vacant. This metric doesn’t just reflect vacant space, but space that is being marketed for future occupancy in advance of planned moveouts, as a reflection of sublease availability or these numbers also reflect the new available space in projects that are in the development pipeline. Right now there is a gulf of less than 500,000 SF between these two metrics—the lowest it has been locally in 15 years. That said, vacancy is likely to climb again in Q2 due to the aforementioned high profile bankruptcies, but it will remain challenging for smaller tenants to find quality infill locations within Class A product and a modest uptick in small box vacancy could eventually be a good thing as they can swap out challenged tenants that were no longer driving foot traffic with the growth concept in the 15,000 to 40,000 SF range that are.

While the recent spate of bankruptcy news may sound extremely challenging, the reality is that through mid-April there have only been six major retailer bankruptcies and every single one of them was on credit agency bankruptcy watch lists before the pandemic. There is no doubt we will surpass last year’s total of 10 major bankruptcies, but that was the least number of retail bankruptcies since the early 1990s. Considering where the market had been over the final half of the 2010’s when “retail apocalypse” narratives were common in the media, both retailers and retail real estate is in a far strong place by virtually every metric.

Bed Bath and Beyond at Folsom Gateway II - Folsom, CA

RETAIL MARKET STATISTICS: Criteria based on: Retail in a Shopping Center. Includes Existing, Under Construction, Proposed, Final Planning

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