COVER STORY, DECEMBER 2009

2010 SOUTHEAST RETAIL OUTLOOK

Northern Virginia

Brokers in Northern Virginia are seeing much of what real estate professionals throughout the country are witnessing: a few small signs that brighter days are around the corner. Improvement in Northern Virginia’s retail market won’t happen all at once, however; there will be no “ah-ha” moment, a point at which everything suddenly gets better. Recovery will be a slow ascension once cash enters the market and sellers start pursuing deals. For the past 3 months, Jim Farrell of McLean, Virginia-based Rappaport Companies has been seeing the market get healthier.

“Day by day, it’s getting better,” Farrell says. “Day by day, we feel a sense of stability returning to the marketplace — nothing approaching the bleakness that we’ve had.”

This is happening now simply because it was time, he says. The various financial debacles have somewhat settled over the months, consumers are starting to spend a little more and the government’s stimulus money is trickling in. While consumer spending and the financial markets are still very real problems, the recessionary ice storm has begun to thaw.

Development won’t awaken from its slumber for quite a while, and quite a few retail projects have been put off until the market recovers. At the intersection of Route 50 and Loudoun County Parkway in Loudoun County, developers had planned more than 1 million square feet of retail. The entitlement processes were going smoothly; leases had been signed. When the market collapsed, the projects were put on hold.

Retail expansions in Northern Virginia are hard to come by, but Wegmans is a chain that is exploring options in the area.

On the other hand, projects are still getting done. Developers have begun the initial phases to upzone the former Plaza at Landmark site in Alexandria with the goal of creating a towncenter property. Wegmans is also making moves in the area.  A marketwide revitalization is, in some aspects, inevitable, but getting there will take patience. By the middle of next year, substantive growth will no longer be a pipedream.

“The end of 2010 will be a time of slow growth and probably a broader base of retailers out in the marketplace looking for deals,” Farrell says.

Nashville

For retail development to pick up in Nashville, the city’s vast swath of vacant space will have to find new tenants. As of 6 months ago, 1,200 big boxes were on the market. While the third quarter vacancy rate is only 7 percent, it’s relatively high for this traditionally tight area. This vacant space primarily was created by the closings of Circuit City, Linens ‘n Things and Goody’s — the Big Three, as David Baker of Baker Storey McDonald Properties puts it. “Those will have to be absorbed before the market will balance itself out to where you can see new construction,” says Baker, a member of the X Team, a real estate brokerage alliance.

Gobbling up space is difficult in the current market because no one is making moves. But this lack of activity is helping tenants who are seizing some good deals. “Today’s tenants are aggressive,” Baker says. “The expanding ones see an opportunity for them to gain market share in locations where they couldn’t have gotten a market share when the vacancy rate was 4 percent.”

The abundance of available space and the negative prospect for new development means that retailers looking for new stores in the Nashville market will have a successful 2010. These retailers won’t have to worry about in the near future is construction. A non-existent development pipeline also means that property value will soon rise. New development has stopped, and Baker can’t really see a point where development will start booming again.

“I don’t think we’ve seen the land prices drop to levels that the tenants are willing to pay for new construction,” he says. “It’s difficult just to get a deal from new construction on shopping centers versus what they could go and find an existing box and renovate.”

New Orleans

Commercial real estate progress in New Orleans is directly linked to the recovery from Hurricane Katrina. In the sectors of the city that were most vulnerable to the storm, flooding wreaked havoc in retail centers; a distressed populace suddenly had nowhere to shop and no money to spend.

“Retail pretty much disappeared in some parts of town and started booming in other parts of town until things started settling down again,” says Rich Stone of NAI Latter & Blum. “Those areas that were most hard hit by the storm are now just starting to re-emerge as far as retail.”

The 184,000-square-foot Gentilly Woods Shopping Center, located on Chef Menteur Highway, was devastated by the flood. In April, the New Orleans Redevelopment Authority purchased the property, and the organization is currently looking for a development partner. The owners of the vacant Lake Forest Plaza have succeeded in naming the site a tax-increment financing district and will start the rebuilding process. In Chalmette, Louisiana, the storm wrecked a 228,000-square-foot Super Wal-Mart, which will re-open in March.

The presence of money targeted at a city-wide rebuilding effort doesn’t mean the New Orleans retail market has been immune to the recession. Stone says the most ambitious project in the city — Colonial Pinnacle Nor du Lac — has been put on hold. With retail being rebuilt, brokers are getting more cheery every day. Each of them know from experience, however, that recovery from the recession won’t come quickly.

“It’s going to be a slow slog back,” Stone says, noting that many people are looking to 2011 for a full recovery. “I think things will slowly get better. I don’t think 2010 is going to be a bad year, but I don’t think it’s going to be a breakthrough year.”

Greenville

Brian Reed of Greenville-based Grubb & Ellis|The Furman Co. expects the holiday season to set the trend for retail in 2010. If consumers choose to save instead of spend, Greenville will most likely experience a wave of retail closures in the new year.

“If [sales] are decent, perhaps they lay the groundwork for rebuilding some confidence for the second half,” Reed says.

Greenville’s market has done relatively well and hasn’t experienced much activity — negative or positive — since Steve & Barry’s, Circuit City and Linens ‘n Things closed locations throughout the area early this year. Reed says projects are on hold because national retailers are slow to commit amid icy financial markets and shaky consumer confidence. Landlords are also suffering from the low activity level and are offering concessions for retailers. 

“In general, it’s as if someone has hit a pause button on the retail real estate market,” Reed says. “The biggest challenge is cash. It’s a catch-22. Loans won’t be made available until retail expands; retail won’t expand until loans are made available.”

Proposed developments are mostly waiting for financing before getting underway. One project that has received support is the 500,000-square-foot Easley Town Center, which is anchored by Super Wal-Mart. This joint venture by Easley Commons Retail Associates, a Cedarwood Development affiliate, and Commercial Development Associates Southeast, is expected to deliver in 2011.   

National stores in the area are banking on a successful holiday season, but a sluggish December may help smaller retailers. “While many national chain retailers have to wait for a full market recovery to expand again, local retailers with a proven model of success have a unique opportunity to get into some great spaces,” Reed says. As Reed points out, however, there aren’t many local stores that can anchor large shopping centers, so instead of putting their faith in a local turnaround, brokers are looking to 2011. “We expect 2010 to be a very slow year from an activity standpoint,” he says.

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