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While entertainment-themed retail options continue to grow due to rising consumer demand, financing obstacles from rising interest rates may hinder the sector’s momentum, brokerage firm JLL (JLL) warns.
Upfront buildout costs for entertainment-themed retail is high to begin with, according to a JLL report released Monday morning at the annual Innovating Commerce Serving Communities (ICSC) conference in Las Vegas. Rising interest rates are compounding these upfront construction costs, which are amortized over the course of a lease and therefore result in higher rents for some entertainment tenants than others in the retail sector within the same market.
“It’s like two forces hitting each other and who’s going to win,” Paul Chase, managing director for agency leasing and retail property management at JLL, said during a media briefing Monday morning at the Las Vegas Convention Center. “The landlords, if they want the use and it has a proven track record and [the tenants are] credit worthy, they are going to play ball with them.”
Chase added that if the tenant lacks experience with the venture they are proposing, property owners will be more reluctant to invest in the project unless the tenant has sufficient “skin in the game.”
The JLL report noted that given rising interest rates, landlords or tenants with sufficient cash who can avoid borrowing will be best positioned to ink entertainment retail deals.
Many entertainment leases involve a fixed-base rent, with an additional percentage that the tenant will pay if they successfully meet an agreed-upon sales threshold.
Some entertainment-focused tenants are seeking property owners to act as capital partners to help finance buildouts. In exchange, the owners get equity in the business. However, many landlords lack the capital necessary to take on this type of investment or want to avoid taking on too much risk, according to the JLL report..
Financing barriers for entertainment-focused retail come at a time when consumer interest in visiting such properties is sky high, with spending at amusement parks and arcades up by 20.6 percent annually in the fourth quarter of 2022, according to JLL. Signs of this demand are underscored by 9.1 million square feet of new entertainment space slated to open in the U.S. and Canada within the next two years, the JLL report noted.
Of the new entertainment businesses planned in the next 12 to 24 months, there are 122 offering multiple games under one roof, including Chuck E. Cheese, Dave & Buster’s and Peter Piper Pizza. Competitive socializing concepts focused on a single game such as pickleball, miniature golf and trampolines are also among the many new entertainment retail tenants scheduled to open soon.
Naveen Jaggi, president of retail advisory services at JLL, does not see a possible recession impacting demand for entertainment retail since unemployment levels remain historically low, noting that headwinds affecting commercial real estate are not similarly affecting consumers.
“You can’t have a recession when you have 3.7 percent unemployment,” Jaggi said. “What we have is a real estate recession because values are going down.”
Andrew Coen can be reached at acoen@commercialobserver.com
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