As the end of the year approaches, many real estate professionals will try to identify and understand the market trends that may impact our respective businesses as we look towards next year and beyond.
A few topics in particular will be on the minds of buyers, sellers, tenants, landlords, brokers and investors in Cincinnati’s retail real estate market as we enter 2023.
Rising Construction Costs
There are few hurdles as impactful to Cincinnati’s expanding restaurant and retailers as the seemingly ever-rising cost of construction. These cost increases continue to put pressure on both sides of the negotiation table. In the Cincinnati market, it has now reached a tipping point and has led to fewer landlords willing to agree to deliver tenant’s work letters, while an increasing number of tenants are walking away from signing leases after discovering their buildout costs have increased by 15-30% from when the deal terms had originally been approved. Buyers are starting to back away from the closing table after realizing their construction costs have increased well beyond what their proforma can justify. The causes of construction costs rising so dramatically are complex. Inflation of raw material prices, supply chain disruptions, and labor shortages are often cited as the main contributing factors. No matter the root cause, high construction costs did not occur overnight, nor will the issue be resolved within a few months. This is a challenge that dealmakers in the Cincinnati market – and most of the country – will be working through in 2023 and beyond.
Continuation of low vacancy and high rents
Many restaurant and retail concepts that had expansion plans in 2022 quickly realized that new construction sites do not align with their budgets (Built-to-Suit sticker shock is real); and therefore, pivoted their expansion strategy to focus on existing real estate opportunities. However, due to the high price of new construction and positive absorption, the “A” shopping centers in Cincinnati are seeing vacancy rates approach 4%. Over the last year, quarter-to-quarter retail rental increases in Cincinnati have averaged nearly 3% with the highest growth period seen in Q4 2021 with 4.2% increase in rent. Landlords in the Cincinnati market have benefitted from the current climate of low vacancy rates, government-backed funding of retail businesses, as well as a lack of new construction and they will continue to do so in the near future. Tenants looking for a “deal” will continue to observe from the sidelines, as more bullish concepts continue to open stores in the market but will be paying a premium to do so. With a steady demand for good space and less supply coming to the market due to rising construction costs, retail rents will hold firm in the Cincinnati market for the foreseeable future.
Active Food and Beverage Concepts
Cincinnati has several restaurant groups actively seeking sites throughout the market including City Barbeque, a Dublin, OH-based BBQ concept, which has recently added two stores to the market with plans for more next year. Ford’s Garage, a Florida-based burger and beer concept, opened their first location in Ohio earlier this year with plans to open two more locations in the Cincinnati area. Robek’s, the O.G. juice and smoothie concept, entered the Cincinnati market with two locations and plans for several more. Meanwhile, familiar brands such as Starbucks are continuing to infill the market. According to Starbucks CEO, Howard Schultz, the company will continue with their growth plans over the next three years by aiming to open stores at a pace of nearly two stores per day in the U.S. market. Earlier this year, Chipotle announced plans to grow their North American store count from 6,000 to 7,000 locations. This is largely being accomplished by expanding into small towns throughout the country. Southern Ohio has an abundance of these strong tertiary markets that Chipotle and other QSRs will continue to target for growth in 2023.
Automotive Concepts are Revving Up
Over the last decade, retail markets across the country – including Cincinnati – have seen waves of intense competition for sites from a particular use category. A decade ago, we experienced the “burger wars” as Five Guys, McDonald’s, Smash Burger, Wendy’s, etc were all trying to out position each other. This was followed by the “chicken wars” as Chick-fil-A, Slim Chickens, Raising Cane’s, were all in expansion mode. Recently, Cincinnati has experienced a tremendous amount of demand from the automotive service category which has led to the “car wash wars” (Mike’s Car Wash, Zip’s Car Wash, Whitewater Express, Tidal Wave) as well as “fuel station wars” (UDF, Speedway, Thorton’s, Wawa, Sheetz, Casey’s, etc) which seems to be picking up momentum heading into 2023.
Despite the obstacles we have faced as an industry in recent years, the Cincinnati Retail Team at Colliers has maintained a strong track record of identifying and executing on opportunities on behalf our local, regional and national clients. We anticipate that 2023 will present new, yet, familiar challenges in our market. However, we believe the best opportunities in a highly competitive retail environment are often created through persistence, market knowledge and strong relationships. If you are interested in learning more about the advantages of partnering with the Cincinnati Retail Team at Colliers for your real estate needs in 2023, we would encourage you to reach out to us today.