The Retail Cannibals
In many high population communities there are retail shopping centers on virtually every corner. Such is the case in the greater Phoenix area, for example, where the major roads are laid out in a 1 square mile perimeter grid pattern, there is typically at least 1 (but, more commonly 2) retail community strip center on a corner at each major intersection. When you consider there are at least 15 contiguous municipalities in this general area, that’s a whole lot of major intersections and numerous retail shopping centers.
But, unlike many east coast and midwest cities that are required by physical obstacles to build vertically, in places like the Phoenix area, aside from the occasional mountain clusters and river beds, the land is relatively level for almost as far as you can see with relatively few physical constraints to prevent development. Consequently, development in these expansive areas, such as “The Valley of the Sun” which started as a small cluster in what’s now known as central Phoenix, has spread out concentrically for more than 30 miles in virtually every direction, and is still growing. The typical pattern of development in this area starts with several major subdivisions of several hundred homes, followed by retail shopping centers at the major intersections, then in-filled with professional offices commonly of the 1-story condo variety.
But, when riding through these areas, you’ll notice there’s a new retail strip or neighborhood center being constructed across the street from an existing retail center. And, it make one wonder, “Where are they going to get tenants to fill this place?”
Well, in some circumstances, there’s a practice called “cannibalism.” This is the practice of building a new retail center, usually containing a retail anchor that’s committed to a lease prior to construction, then going out to the typical national and regional companies and franchises (e.g. Starbucks, Subway, Pizza Hut, Papa John’s, Vitamin Shoppe, etc.), and finally filling the remains with local businesses. It’s at the local business level that the practice of cannibalism usually occurs.
What happens is, the developer or their agent goes out into the local existing retail market area seeking out those in older centers, centers in areas that are no longer being patronized by the mid to upper income people who have moved out of the area into the newly built subdivisions. They approach these local businesses and sell them on the idea they would benefit from being in the new center. And, depending on the developer’s desire and economic circumstance, the developer of the new center may offer certain financial incentives, such as a term of free or reduced rent, or lower cost or certain free built-outs, all to get the tenant to make the move.
So, what frequently happens is, the developer of the new retail center will lure existing tenants from other centers into the new center, which leaves the older center with a vacancy. This is an example of “cannibalism.”
However, when you consider the millions of square feet of new retail shopping centers that have opened over the most recent few years, combined with the declining general economy, it’s not too difficult to understand the economic damage being done to existing retail centers. But, as an unintended consequence of this practice, not only is the existing retail center sector suffering, but so too is the new retail center group.
The problem being encountered by the typical owner of the new retail center is, that his local business that moved from a center in which their business was already known, now (more frequently than not) has to re-establish their business in the new center; this is just like being a start-up for many of these businesses. Consequently, many of these local businesses are failing to make enough money to pay the rent, and are closing.
So, now what we are seeing, is growing vacancy in both the older retail centers as the result of tenancies being lured into new centers, and growing vacancy in new centers due to the failure of many of those relocated businesses.
What’s that saying? What goes around, comes around?
