COVER STORY, AUGUST 2009

FLORIDA RETAIL ROUNDUP
Value tenants prop up unstable retail market.
Patty Vaughan and Jon Ross

More than office, industrial and perhaps even the multifamily sector, the retail market has staggered under the weight of the recession. Retail tenants are directly tied to the whims of consumers, and when people no longer have money to spend on extraneous goods, tenants, owners and developers suffer.

Retail real estate in Florida’s major cities has been trying to stay alive through the downturn. Some areas are doing better than others — Orlando’s tourism cachet is a high point — but, throughout the state, many markets are dealing with the same pressures. Financing for retail is a dirty word. Consumer confidence is in the cellar.

In every city, brokers are confident better times are around the corner. A resurgence, however, won’t bring about a fundamental change in retail, but developers will start thinking more carefully about how to connect with consumers and tenants. John Crossman of Orlando-based Crossman & Company has seen inappropriate development in Orlando and throughout the state. Going forward, he says, this will stop. “When markets get hot, you see some rule breaking,” he says. “There are some town centers that got built that are town center in design, but they’re not town center in reality. There are some malls that have been built that have become sterile, and they’re disconnected from their own communities.”

Last issue, Southeast Real Estate Business covered the West Bay Sector Plan, which will eventually bring a large amount of retail space to Bay County in Northwest Florida, an area that’s developmentally lagged behind the rest of the state. In this issue, brokers, developers — even a lawyer — talk about the retail market in five key cities: Jacksonville, Tallahassee, Miami, Orlando and Tampa.

JACKSONVILLE

Business throughout Jacksonville is fluctuating just as it is throughout the rest of the United States. However, this is a cycle that retailers in the city have seen before.

In Jacksonville, the retail market has been affected by the economy, but not as badly compared to other areas in the state, says Jim Morgan of Sperry Van Ness’ Jacksonville office. The volume of activity is low compared to past years, and the vacancy rate is rising, but Morgan believes Jacksonville is still stable. “We do not appear to be quite as vacant as some of the other market areas around,” he explains. “Even though we’ve had fairly dramatic declines, we’re still a fairly stable environment.”

Many national retailers are closing up shop across the country, while others expand. The same is true in Jacksonville. Target has slowed its aggressive expansion plans, but Publix and Winn-Dixie are looking for new sites to build. Gary Montour of Colliers Dickinson’s Jacksonville office believes that some stores are able to survive because consumers are only buying the essentials. “Stores that are doing well are selling things that people have to have, such as food and gas,” he says. “People still have to live. Those are the ones that are making it.” Montour says currently companies are cutting stores where they don’t necessarily need them, and if leases are up for renewal, they’re negotiating rents that are more in-line with their sales projections.

New development has stopped, and one of the main reasons is the lack of financing. According to Morgan, there are three aspects that have greatly affected the financing of retail. The first problem involves revenues and consumer spending. “Revenues are down for the retailer because of consumer spending, so they’re being very careful about their pro formas and their commitments as a tenant to the developer,” he says. The second problem involves the developer and how much money is available for a project. “[The developer] is having to come to the table with more money,” Morgan notes. “[He or she] has to have proven experience, more equity, and has to lock up his or her tenants in a more careful manner in order to go forward with the center.” Lastly, Morgan says that rates are being projected on higher levels, which brings on the threat of inflation.

What’s occurring now in Jacksonville has been a repeating cycle. To figure out how to break the cycle, officials should examine the last few downturns, Montour notes. “Every time we’ve had recessions, developers are more careful and look at absorption harder,” he says. When the downturn ends, he says, these good habits vanish. “[Developers] have a tendency to get more aggressive, and lenders have a tendency to give more financing.”

Ultimately, society learns from its mistakes. Society is creative, and it comes up with new way to do things differently. A positive aspect that will come out of this recession, Morgan explains, is that smart workers recently fired from downsizing companies may start the next retail trend. “Right now, there’s so much big box space available,” he says. “The talented people are still going to find a place to do entrepreneurial things.”

TALLAHASSEE

The retail market in Tallahassee is fighting through tough economic times fueled by the strength of smaller retail tenants, steady employment rates and a confident outlook for the future.

“The retail market is softer than it usually is, and it’s getting slightly softer every month,” says Ed Murray of Tallahassee-based TALCOR Commercial Real Estate Services. Murray believes the 30,000- to 50,00-square-foot boxes are driving the high vacancy rates higher. “Larger infill troubles are a trend in the state and throughout the country,” he says. Small- and medium-sized retail spaces are holding up well. Grocery stores, sandwich shops and restaurants are the most active, according to TALCOR’s Frank Langston. “A lot of tenants are renewing,” he says. “Your value-type tenants are the ones that are doing pretty well.”

Consumer confidence is the main way to get the retail market back to where it was before the economic crisis, Murray says. However, because the uncertainty in the market still stands, consumers are holding onto their money until they believe the market is 100 percent safe again.

Currently, the employment rate for retail facilities is higher compared to the overall employment rate for the state. According to Frank Langston, “more people are employed in more steady jobs.” Bringing new industry — and the new jobs that come with it — into the city helps generate retail activity. “We work by targeting those sectors that are going to create a job that’s at least 115 percent of the average wage for our region,” notes Beth Kirkland of The Economic Development Council of Tallahassee/Leon County. “Attracting and retaining employers who trade their goods or services outside of the region — that brings money back, and that supports the retail and services sector.”

The recession will fundamentally change the retail sector. One of the adjustments to come out of the downturn, according to Langston, is that consumers will have to start getting used to retail buildings without the most modern design or the most up-to-date features. Building new retail lots every 2 to 3 years is not plausible because of how the market is panning out.

“You’re used to going into the latest, shiny or newest whatever, but I think we’re going to see a lot of things that will be freshened up and recycled and used for a longer period of time to make the numbers work out,” Langston says. “We’re all going to have to get used to something that’s a little bit older and maybe not as shiny.”

MIAMI

Retail activity in Miami is akin to a see-saw. On one hand, deals are getting done, and while far from robust, the market isn’t stagnant. But this can change quickly. The other side is occupied by nervous tenants and scared consumers — signs of an unhealthy retail sector.  

“Every month, there’s a pulse,” says Jeremy Larkin of NAI Miami. “The opposite months, there’s a contraction. You see activity, then you see things slow again.” Larkin has actually witnessed retailers move 95 percent of the way through the leasing process, only to pull out at the first sign of a market fluctuation. “It’s indicative of the whole consumer mentality,” he says. “The one thing they’re looking for is certainty.”

Retail development in the city and its outliers is non-existent. Of course, small projects started before the recession swept away development momentum are still coming online, but it simply isn’t a good time to start something new. Rental rates have plummeted, and it’s difficult for developers to find financing; as Larkin puts it, in this market, the economy simply isn’t on the developer’s side. “For a property today to make money, you may be able to pay $10 a foot for the land. If they paid $30 a foot for the land, which a lot of them did, the economics don’t work,” he says. “No matter what they do, they’re upside down. Their land is worthless. They can’t get a construction loan, and they probably have an acquisition loan coming due.”

In between economic fluctuations, retail rooted in necessity is doing better than other concepts. Fort Lauderdale-based Moss & Associates recently completed the development of two Publix stores in Miami, totaling 70,000 square feet. This activity, however, is rare, and tenants dealing in discretionary and soft goods are having a tough time. Seemingly less clear cut, restaurants are rising and falling on a case-by-case basis. “Profit margins are definitely suffering,” Larkin says, “but there are clear examples of where you’ve seen restaurants in 2008 grow revenue-wise and in 2009 continue to grow revenue-wise. That’s the rare exception.”

The recession can’t last forever, and moving forward 2 years from now, retail development in Miami may look very different. Larkin remembers that in the 1960s and 1970s, strip shopping centers were the development hot item. Developers in the ’80s and ’90s turned their attention to enclosed malls. Subsequent building waves have included an emphasis on lifestyle centers and a move toward mixed-use projects. Convenience-based retail will rule, Larkin says, but developers have to be smart about where they place buildings and have to consider the economic and convenience motivations of nearby residents. 

“The industry’s a very dynamic industry,” Larkin says. “[Retail] is going to morph, and it will become something different.”

ORLANDO

Orlando’s shining light is tourism. Vacation areas and theme parks throughout the city help attract consumers who, in turn, frequent Orlando retailers. Tenants are still struggling in Orlando, but entertainment-based retail is propping up the industry.

“The key to retail in Florida, and in Orlando in particular, is the ability to sustain profitable retail sales,” says Lee Arnold of Clearwater-based Colliers Arnold. “If the tourist-consumer falls off too much … it’s going to start to impact the recreational and entertainment retail.”

Retailers are changing their business models and adapting to the challenges of the market. Lower-leveraged restaurants are now looking at higher margins, spurring on minor expansions in the area. Discount retailers are looking for new places to set up shop. Wal-Mart dollar store concepts and grocery stores are all doing well. T.J. Maxx is also looking at locations, Arnold says.

“Value seems to be the name of the game,” he says. “Value’s really important to the consumer today. Those that are emphasizing value, entertainment, convenience — those will work no matter what the population or employment growth is.”

The Village at Lake Lily in Maitland, Florida, will contain 22,459 square feet of retail space.

There are some small developments coming out of the ground in and around Orlando. At the intersection of South Orange Avenue and Page Street in Orlando, Cater-Crossman Investments is developing Orange Avenue Square. The property will contain 7,000 square feet of retail space. In Maitland, The Morgan Group is developing The Village at Lake Lily, which will encompass 22,459 square feet of retail when complete. This fall,  WindCrest Development will open its 67,000-square-foot Shops at Stoneybrook Hills. The center, which is anchored by Publix, is located in Mount Dora.

The 139,751-square-foot Southgate Shopping Center in Lakeland is currently going through the redevelopment process. “It’s actually a very good time in the market to be doing redevelopments,” John Crossman says. “Typically in a redevelopment, you have to move tenants around, and when you’ve got a little bit higher of a vacancy factor it makes redevelopments easier.”

The Lake Nona market of Orlando has also shown steady retail growth bolstered by the healthcare sector. Lake Nona Village will bring 12,500 square feet of retail space to the area. “The Lake Nona market is emerging as one of the key areas of growth in Central Florida and in the state,” Crossman says.

Where new retail seems like a bad idea, developers are trying a different tactic. Infilling former retail with civic tenants helps prop up the market by creating new consumer demand. “Some retail boxes have become churches, some have become offices, some have become schools,” Crossman says. “The remaining retail in those areas benefit from the traffic those non-retail uses create.”

Even with a few tenants looking to expand, retail in this day and age is still a challenging business. “It’s the most massive slowdown of new development I’ve seen in my 17 years,” Crossman says. “There are some companies that are scrambling to diversify late in the game, but it’s pretty late in the game to be diversified.”

“All transactions today seem to be challenging to get to the finish line. Few of those fish are flopping in the boat,” Arnold adds. “We’re having to do a lot of shoe leather, we’re having to stay very close to our best clients who are constantly retooling.”

TAMPA

James Shimberg of the Tampa-based law firm Holland & Knight equates Tampa retail with the national market. In both cases, development has stopped and business has slowed.

“The Tampa market has suffered a similar fate to other retail markets around the state and around the country,” he says. “There are very few new retail projects coming out of the ground. What we’re seeing primarily is finishing projects that came out of the ground a year or more ago.”

The $35 million Shoppes at Royale in St. Petersburg.

One of those projects is Porter Development’s $35 million Shoppes at Royale in St. Petersburg. Construction of the 91,000-square-foot shopping center started in early 2007 and finished in June.  A 45,600-square-foot raised Publix anchors the center.

“It’s a tight retail market,” says St. Petersburg-based Porter Development’s Les Porter, “and there were several tenants that either wanted to penetrate the market or reposition an older store in the market. Retail demand drove the site.” About 15,000 square feet of shop space has yet to be leased.

The company tore down office buildings to create space for the development, which includes 120 parking spaces under the raised Publix. Porter says it’s the first large-format store that’s been built above ground. “There was a lot of excitement created by it,” he says. “Long-term, it will definitely help the center because it adds to the uniqueness of it.”

Developers have stopped thinking about new projects because they can’t get construction loans. Lenders have money to hand out, but the financing game has changed so much that it’s hard to get new developments approved. Loan-to-value ratios and cap rates have all changed. Lenders are more conservative. “A lot of lenders just aren’t interested in participating in the retail market right now,” Shimberg says. “Retail is viewed as more problematic than office and industrial, although there are concerns that we might get to the same point fairly quickly with office.”

Throughout the market, owners are scrambling to find tenants for their centers. Existing tenants are looking to renegotiate leases, and no new retailers are signing up for space. “There has been a tremendous pull back among national tenants,” Shimberg says. “There’s very few games in town if you’re trying to lease up a retail center right now.”

Shimberg says retail’s problems are tied to the struggling housing market. Projects were planned on expected residential growth, and when the economy stopped functioning, developments were scrapped. “To a large extent in Florida, retail has always been tied to housing,” he says.

Instead of planning new retail centers, which, at this point would simply be going through the motions, developers are trying a new tactic. These out-of-work real estate professionals are offering their services to lenders.  “A lot of developers … are going into the consulting area,” Shimberg says, “because there is no development or the scope of development is reduced to such an extent that their opportunities lay more in the consulting area.”

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