Retail development down to 90 million sf in 2009: report
Developers are putting the brakes on new centers this year as both consumer demand and financing dry up. Marcus & Millichap predicts that 90 million square feet of retail space will open this year, down from 131 million square feet last year. This is the lowest amount since 1995. New mall development is slowing, with only 6 million square feet slated nationwide this year. This slowdown will help stabilize the market in 2010 before a recovery starts in 2011, the firm says in a report.
It will not stem the tide of vacancies, though. Marcus & Millichap says U.S. retail vacancy will rise by 180 basis points, to 10.2 percent, this year, following a 120-basis-point increase last year. And rents are getting cheaper. The firm says average retail center asking rents will decline 4.5 percent this year, after holding steady last year. Effective rents slipped 1.1 percent last year and are expected to drop 5 percent this year. Many oversupplied markets will record steeper declines.
Most of the distress in the market last year was tied to maturing debt, but falling occupancy and rents will further compound things through this year. Marcus & Millichap considered some $10 billion of U.S. retail assets distressed at year-end 2008, with an additional $24 billion at risk. The rising number of distressed properties has caused buyers to expect deeply discounted pricing, even for properties that are operating soundly, the firm says. Outside of top-tier assets in prime locations, the expectations gap between buyers and sellers remains fairly wide, the firm says, though it does appear to be closing.
Funds still flowing into commercial real estate
Despite the turmoil, investors stayed in the commercial-mortgage-backed-securities market last year. Commercial mortgage debt outstanding grew to $3.5 trillion in the fourth quarter, up 0.7 percent from a year ago. The full-year total of $166 billion was up 5 percent from 2007.
"Counter to what many expected, investors increased their holdings of commercial and multifamily mortgages during the fourth quarter," said Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association, in a prepared statement. "Banks, thrifts, Fannie Mae, Freddie Mac, life insurance companies and other lenders extended additional credit to the market during the fourth quarter, lending more in new commercial and multifamily mortgages than they saw paid off or paid down on existing loans."
Commercial banks continue to hold the largest share of commercial mortgages, at $1.55 trillion, or 44 percent of the total. Many of those loans are related to owner-occupied properties, with only 52 percent being income-property loans such as those that finance shopping centers. Asset-backed-securities are the second-largest holders of commercial mortgages, accounting for $746 billion, or 21 percent. Life insurance companies hold $316 billion, 9 percent of the total, and savings institutions hold $193 billion, or 5.5 percent.
'Spec' spaces help sustain occupancy for some landlords
In this economy, developers must rely on more than just the national tenants to sustain their shopping centers. Interfin, for one, is bent on boosting local and regional retailers by providing them fully furnished speculative spaces at its Vintage Park lifestyle center, in northwest Houston.
Seven spec spaces measuring from 800 square feet to 2,700 square feet are being built at the 16-building, 324,000-square-foot center located within the Vintage mixed-use development. Completion is set for May.
"The thing we have found since leasing activity on the national scene has slowed and larger retailers have stopped expanding [is that] a lot of the growth that is generated is from local and small business and independent owners, and those guys can be overwhelmed by the thought of the construction process," said Melissa Goedde, Interfin's director of retail management. "Some of them have trouble obtaining the financing to complete a full build-out. Our ownership is strong, and we can afford to do this and provide the incentive for these retailers to come in and occupy these spaces. The tenants can customize it for their needs if they want, but they can move right in and open shop."
Interfin, which introduced spec spaces previously at its Uptown Park lifestyle center, in Houston, wants to draw the likes of jewelry and women's wear stores. Once established, these can move into long-term deals in larger spaces within the center.
"At Uptown Park, we used the less leasable space that was more difficult to move," Goedde said. "With this project, we chose prime locations where people could come in and benefit from heavy-traffic neighbors that were already there and energize the center and re-energize leasing activity."
Cities report decline in Main Street retail
Mom-and-pop shops are struggling even harder in this economy than national chains are. The National League of Cities says 64 percent of the city officials it surveyed report retail sales are down this year from a year ago, and 57 percent say store closings in their municipalities are "worse or much worse." The league released these results at its Congressional City Conference last week in Washington.
"Locally owned businesses are vital to the health and makeup of a community," said Kathleen M. Novak, president of the league. "The relationships established among local businesses create a strong network with broad economic dependencies. With their loss, the impacts can be enormous on a community."
Three-fourths of the officials polled report that declining sales tax revenue is a pressing concern, and 70 percent say poor retail sales and increased store closings are hurting other local businesses and the regional economy.
On a positive note, two-thirds of city officials say they are cooperating with the business community to address local challenges. More than half say they plan to pursue mixed-used redevelopment once the market recovers.
A YouTube for the shopping center industry
Seeking a new store location? In the market for a property? Need to get the look and feel of a project? Fine, but forget the airport, and leave the car where it is. Now it's possible to visit that shopping center virtually.
Perhaps borrowing a Web page from the YouTube playbook, ShoppingCenterVideo.com helps retailers, brokers, developers, architects, appraisers and other shopping center scouts slash the time, energy and money they would otherwise spend hunting for that perfect property.
It's the smart move in today's economy, says Charles Silver, the Miami-based broker who created the Web site. "With driving around, a lot of times there are so many people involved with making the decision - the architect and the construction company, for example - that not everyone can get there," Silver said. "We're not saying this is the only thing that an owner would use to lease or sell an asset, but it is a great new tool."
Here's how it works: A shopping center owner uploads a video of the property on the site. Interested parties then click through the site by market, saving shoe leather as they view. Property owners with the skills and equipment to create and upload their own videos may do so free of charge. Otherwise, for a $1,775 fee, a videographer will travel to the shopping center to record and edit the video footage and upload it.
The videos typically run about two minutes and include the monument sign, center and store exteriors, anchors, and stills of the aerial view and site plan. Owners can also post links and additional information.
TRANSACTIONS
Dallas-based Sarofim Realty Advisors bought a 72.5 percent stake in an unnamed, 99,718-square-foot neighborhood shopping center in Glendale, Ariz., from private investors for $15.5 million.
Hallandale, Fla.-based Isram Realty Holdings bought Western Way Shopping Center, a 143,000-square-foot neighborhood shopping center in Brooksville, Fla., for $11.5 million. The seller was WR Dallas, an entity backed by Chicago-based Jupiter Realty.
St. Petersburg, Fla.-based Sunrise Plaza Holdings bought Belleair Bazaar, a 38,569-square-foot neighborhood shopping center in Clearwater, Fla., from West Bay Drive LLC for $6.5 million.
Barbaccia Properties, of San Jose, Calif., paid $4.3 million for 3690-3702 W. Shaw Ave., a 16,200-square-foot retail center in Fresno, Calif.
THE COMMON AREA
Mexican mall developer Planigrupo says it will invest $300 million this year in the construction of 10 shopping centers catering to lower-income consumers. Last year ithe firm built five new malls, at a cost of $120 million, and it expects to invest more than $100 million on construction next year.
Cable TV operator Comcast is joining Sony Corp. to launch a retail concept based on the Sony Style store format. Sony Style Comcast Labs will showcase state-of-the-art broadband equipment and Sony PlayStations, laptops, cameras and camcorders. A 3,400-square-foot store was set to open in Philadelphia's Comcast Center last week.
Mike Carroll has been promoted to CEO of Centro U.S., the U.S. division of Australia-based Centro Properties Group. The appointment of Carroll, who was COO of Centro U.S., coincides with the announcement that Glenn J. Rufrano's tenure as Centro Properties CEO has been extended for 12 months, effective March 1. Rufrano became CEO last January. Tony Clarke was named CEO of Centro Australia. Clarke, who was CFO of Centro Properties, will retain oversight of those functions when a new CFO is named.
Economy watchers should not underestimate American malls or consumers - both are set to rebound strongly, said David Simon, CEO of Simon Property Group, in a lecture at the Wharton School. "I'm going to bet on the American consumer a bit more than CNBC and the others," Simon said. "I think [retail] will bounce back a little bit faster and harder than most people say."
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