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State Of The Industry
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State Of The Industry “Don’t worry, be happy” seems to be the attitude that most industry professionals are taking this year. Despite potential terrorist attacks and an ongoing war, the results of a recent survey by The Dealmakers shows that retail real estate executives from across the country are expecting their pockets to get just a bit deeper in 2004. Here are the results: Do you believe 2004 will be more profitable than 2003? Yes, Yes, Yes made up most the responses from this question, with 89% expecting their income to grow from the previous year. “Definitely, and we are putting our portfolio up for sale to take advantage of the end of the ‘buying spree’,” said one developer. While that pretty much summarizes the feelings of most industry pro’s, some are taking a cautious approach. “Subject to no terrorists events in the USA, we do expect 2004 to be as big, if not bigger, as far as dealmaking goes” and “I believe 2004 will be more profitable than 2003, as long as we suffer no major homeland security crisis.” Some companies are just beginning to complete deals they initiated years ago. “Yes, but only due to refinancing deals we have been re-developing for years that are now complete and being re-financed at rates lower than originally projected,” said one developer. “Increasing profitability from acquiring new properties is difficult right now. While tenant demand is very good, most tenants are trying to drive punitive deals.” “No, with rising interest rates and expenses and strict Cap rates and rents, I think there will be pressure on net income” and “2004 will be the same or better than 2003, (but) only in high end areas. In lower income areas the market is getting worse.”
What markets do you work in? Brokers who work nationwide gave us one-fifth of the responses, while the West, Midwest, South, Northeast and Southeast were also well represented in the survey. The least responses came from the Southwest and Northwest.
Are retail vacancies increasing or decreasing in your market? Get your spaces while you can. Only 11% of the respondents saw an increase in the amount of retail vacancies. “For our size requirements, vacancies are tough to locate,” said one retailer, who speaks for many in the industry. Other responses included “Generally I would say they have been consistent. However, competition has been increasing” and “The absorption is good, but we are in a real building phase.” Others saw the big boys in the big cities beating up on the little man. “While we are not in a property management, the trend I see is a ‘survival of the fittest’. The successful malls are not increasing vacancies, but there are other malls in every market which are losing tenants. Since the good malls cannot add to their existing high percentage occupancy, the overall statistic would be increasing vacancies in total mall occupancy. There may be a few geographic regions suffering less, but they would be the exception to this trend.” Approximately 64% of the respondents felt that vacancies were decreasing, while 25% said it had stayed the same.
Is there more big box space or small shop space available in your market? This question turned out to be a near toss-up, with 48% seeing an increase in small shop space, 36% believing there is more big box space and 16% thinking things have stayed the same. “I have noticed that there seems to be an influx of big box users in the higher end trade areas, which wasn’t the case in prior years. They seemed to have located in more moderate-income areas in the past. Additionally, I believe that the big box users have become more popular with the higher-end consumer, which seems to validate their decision to broaden their site selection base. This would also fall into the area of new real estate/retail trends.” Others saw an increase in small shop space due to a boom in residential development. “This has increased the density of our residential areas, leaving no large undeveloped plots of land (or relatively few of them) for big box retailers to have their usual 14 to 20 acres. Several big name big box retailers are working on seven to nine acre presentations to be able to ‘fit’ into some of the city locations, which are available. But those locations are few and far between.” Said another industry expert: “As usual, the best locations are gone pretty fast. However, overall big box space is decreasing and small shop space is increasing. With interest rates low, it seems everyone thinks they’re a developer. We’ve got too many un-anchored small strips coming online!”
Are asking rents and prices for shopping centers rising or dropping compared to last year? Prices are going up, according to 75% of the respondents. Some responses included: “(Rents are) rising because of the lower vacancies, dwindling land supply and rising development/construction cost” and “I feel that ‘asking’ rents are increasing because landlords feel more confident based on the country’s alleged economic growth.” While that may be true for some, others see a different pattern. “Dropping in old centers. Rising in good, new locations,” said one broker, while another believed that costs were “Rising in urban ‘lifestyle’ markets and areas that are very high traffic. Otherwise I believe that craftier deals are being closed, so prices may not have decreased per square footage, but tenants are getting more commitment out of the land lord.” Approximately 23% saw the prices as staying the same, while a measly 2% thought the cost of centers were dropping. “Big box are about the same as last year. Small shop space is increasing. However, I think they’ll be dropping within the next 12 to 24 months as the new unanchored strips will not lease-up.” One broker thought that prices can’t get that much higher. “I think they’re about to reach a peak,” he said.
Have you noticed any new trends in retailing or real estate? Here is a sampling of the answers: * “Continued ‘flow of traditional ‘mall’ tenants to outside mall environments!” * “I see an explosion of the casual dining and quick service restaurant chains seeking space in the 2,000 sq.ft. to 3,000 sq.ft. size. A number of new concepts with either a Mexican, Asian or Noodle theme.” * “Not new, but de-malling and consolidations continue.” * “No, the ‘lifestyle center’ remains the largest segment of development.” * “(There are) fewer small tenants every year.” * “With easy money everyone is trying to be a developer and creating unreasonable expectations for land sellers, which will negatively impact everyone very soon if not already.” * “Landlords are putting a little more into their strips, upscale appearance.” * “Urbanization flight from malls.” * “Unique stores like Build-A-Bear (have been around for a few years). Discount stores locating in traditional malls (been happening for a little while).” * “Yes, retailers and new centers are being designed as ‘boutiques’. Malls with a community center look and environment, i.e. outdoor cafes and fountains.” * “Strong retailers getting stronger and the small players failing.” * “Proliferation of new restaurant and home furnishing concepts.” * “The sameness of major retailers are homogenizing the shopping centers to such an extreme that you don’t know if you’re in Ohio or California. With 90%-plus of the ownership of the shopping centers in the hands of REITS, the demand for “credit” tenants makes it very, very difficult for innovative upstarts to get a toehold in a great location.” * “Fixing CAM increases seems to be a common trend.” * “As far as lifestyle trends, it’s amazing to see how many ‘lifestyle centers’ are being planned and built in very close proximity to established regional malls (sometimes across the street). It used to be that they were built away from the mall in order to establish their own identity (Saddle Creek in Memphis, Southlake in Dallas, Wheaton Square in Chicago, etc.) That appears to be changing. As a predominately mall based retailer this is a growing concern.” * “As we respond to a housing shortage, it seems everyone wants to consider residential as a key component to their centers. And not just one or two levels of housing. We’re now looking at master-planned communities with four to five stories or condo towers as a part of what previously was just retail. Lifestyle is still aggressive, but it now also includes office components. Also, low performing office towers in our urban core are becoming retail base with residential above as a response to our return to our cities, shortage of urban retail and cost of new construction components such as steel and cement.” * “Continued growth of ethnic oriented retail.” * “We are getting more mixed use developments, far too many banks and every type of food tenant imaginable.”* “Super Wal*Marts are scaring everyone, especially grocers. Trend towards looking for space near those supercenters versus locating in existing retail bases.” * “Yes, the low rates are making some home builders think they are retail developers! Shame on the lenders for falling for that again!” * “The major trend in retailing is the emergence of more apparel stores catering to older women versus the teens. Also, lifestyle and town centers are becoming the major location of choice amongst the high-end retailers that traditionally went into malls.” * “As for new retail trends, I cannot help mention one that will be interesting to watch. Movie Gallery is rolling out a new concept of ‘modular’ buildings, which will be located in markets that cannot support a typical freestanding store. They intend to roll our 200 to 300 of these stores a year. I have seen the test stores and cannot believe they are ‘modular’!” * “Larger influx of ‘amateurs’ entering the ‘no risk, easy money’ real estate market, which should produce some interesting foreclosures in the next couple of years.” * “Developers not wanting to describe their projects as lifestyle centers, a contrived term by ICSC, but rather urban retail, even in the suburbs, as ‘main street’ type setting.” * “No, but we desperately need new trends.” Do you expect your personal income to rise in the coming year? Once again most everyone is in a positive mood, with 82% expecting an increase. Just a slim 18% won’t be looking for more money in their paychecks. What type of deals were you looking for in Vegas and did you find them? Most of the attendees seemed to have hit the jackpot in Vegas, but aren’t expecting that luck to last too long. “We found the convention very productive and I think there is an unreasonable euphoria in the business right now,” said one attendee. “The markets have been good over the last few years. I believe it is going to get much worse, not better. As interest rates increase and Cap rates decrease, we are seeing increases in land and building costs with no movement in rental rates, which will squeeze yields to the point that credible developers will look very carefully to be able to justify the risks involved.” One respondent was very succinct. “Looking for new anchor activity (found it) and new fashion tenants (didn’t find it),” he said. Some were just plain discouraged following their trip to Sin City. “I was looking for new retailers, there was none. I was embarrassed by the female speaker who gave out awards and did not like ICSC’s effort to segregate the males from the females in the industry, we are past that. The only way to change is to work harder and smarter and move forward. It’s the same retailers every year, no new ones, so it’s more of a relationship-building experience. The sessions were not inspiring and brought nothing to the table. The same retail booths-but with people giving out some resumes as companies continue to find ways to shed any unneeded staff expenses.” Some industry observers believe everyone was chasing big boxes. “But given the limited big box portfolio we carry, we just didn’t have the right bait to reel them in. Excuse the reference to ‘bait’, but you do need the right bait to catch a big fish. We did however find deals we thought were almost non-existent because of recent trends in retailing. We came to find out there are companies out there that are changing the way they do business and are doing so to become recognized brands once again.” Maybe it was the few bad hands of blackjack, but some buyers just didn’t like their cards. “We found a lot of deals too expensive to buy,” said a respondent. Still, lady luck prevailed. “We were looking for some national tenants to represent. However we tripped over some unexpected opportunities regarding land sales.” So with a little luck, a positive attitude and some hard work, it looks as if 2004 will be a very profitable year for the retail real estate industry.
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