On the Up and Up

by Patrick Flanagan

With retail rents rising, look for sexy new developments to house exciting entries into the market, along with impressive infill projects in legacy corridors.

Driving rents higher - that is the name of the game regarding prime retail real estate in the upcoming years.

And the tipping point is upon Lafayette, as new retailers want to play in our sandbox. But there aren't enough existing castles to go around.

With the Great Recession truly only presenting Lafayette's economy with a hiccup or two, the national tenants have seen their sales figures continue to climb, and their peers have taken notice. The problem: Where is the opportunity for these new entries into the market to set up shop? The short answer is it doesn't exist; it's time to build new castles.

Welcome new construction - it's actually already here, with more to come. This is the only way for the retail expansion in Lafayette to continue, and continue it will. You see evidence of this already with the Whole Foods-anchored Ambassador Crossing development. Between now and the end of 2015, I'd feel confident guessing Lafayette will see half-a-million-plus square feet of retail expansion, which will only add fuel to the $6.02 billion fire that is Lafayette Parish retail sales figures of 2013.

The newer/bigger/sexier developments will work to lure bigger and bigger national names to the market, in turn casting a wider net to catch consumers willing/wanting to drive into Lafayette to dine, shop, play, entertain. Barring any natural or man-made disaster, the next few years should be an exciting time.

While the timing is ripe, there is a new cost of doing business, both for the most recent entrants into the market and for the existing retailers considering relocation or with leases coming up for renewal. Development costs are simply higher now than ever before - only starting with the price of dirt on a retail corridor that is enticing enough for the best national brands. It continues with required off-site infrastructure by the Louisiana Department of Transportation and Development and local traffic departments, including deceleration lanes, new turning lane configurations, traffic signal devices, sidewalks, adjacent development connection aprons, etc.

A developer then gets into the escalating costs of site work, drainage, utility infrastructure, in addition to the bricks and sticks that we all see above the ground - all while trying to drive rents higher and compress returns in an attempt to end up at a proforma that is profitable enough to take on the onslaught of development risks.

At the end of the day, the retailer will bear the costs in a rent factor up until a breaking point based on their respective sales projections. Even with Lafayette's recent history in retail sales expenditures and growth, the rents will be pushed to the limits to make new deals paper out. That said, with the right balance of public/private partnerships, new developments will hopefully come to fruition to allow new outside (of Lafayette Parish) monies to be spent within our city. This new sales tax generation will trickle down to our schools, safety officials, roads - creating more of an opportunity for this community to continue to grow organically and better the overall quality of life it offers for everyone.

Beyond net new development, expect some redevelopment along our legacy corridors to gain traction. There is an overwhelming desire and trend for retailers to spend more time investigating backfilling into very densely and established arterials - Johnston Street would be Lafayette's example of this. Many of the retailers' new prototypes won't fit into existing structures; therefore, keep an eye out for more land assemblages and teardowns to occur. This will bring new life to tired intersections, have more dollars spent than a simple renovation, and have the new developments conform to new city regulations (signage, etc.). While this framework costs the retailer more, the risk mitigation of knowing that they are located in an established and dense area, instead of a growing future wish, is worth the expense.

All of these scenarios lead back to escalating rents, and not just for the new kids on the block. The existing shopping center owners and landlords will see an increase trickle down to them as well. As the sexiest retail developments and backfilling of heavily trafficked corridors will do the heavy-lifting of leading the charge, rest assured savvy landlords will gladly bump their respective rents a few basis points on their next new deal or renewal.

In a perfect world, a portion of those monies will go back into their properties as upgrades and renovations ... and a new bucket of sand gets dumped into the sandbox.

Ryan P├ęcot is a commercial broker with Stirling Properties. Since 2001 he has worked out of the firm's Lafayette and New Orleans office. Contact him at [email protected] View his presentation here.