COVER STORY, MAY 2009

RETAIL MARKETS STILL KICKING
New retail projects on hold, but key tenants stay strong.
Jon Ross

Commercial lenders began tightening their grip on available funds in early 2008, and by the beginning of this year, it was nearly impossible to get a large commercial real estate loan, especially for retail projects. After 6 months of fewer and fewer lenders issuing retail loans, and despite the federal government’s attempts to reignite the flame of commercial lending, the market is still a long way off from righting itself. “It really hasn’t recovered in any meaningful way,” says Warren Higgins of Capmark Finance. “Debt capital is very difficult to find, and when it’s available, it’s only available under very conservative and expensive terms.”

Retailers have the added pressure of slow sales and consumer uncertainty. Lenders also weigh the number of retailers that have downsized or gone out of business since the recession hit into lending decisions. “If you’re a lender, you’re obviously going to be very skeptical of any of the tenants in any of these projects that you’re presented with, so it’s not surprising that retail is one of the least favorite property types,” Higgins says.

Across pockets of the Southeast, varying property types are fairing well in this recession. In the Gulf States, hurricane recovery is fueling office and industrial growth, and office activity in Washington, D.C., has been sparked by the federal government. Retail, however, is suffering across the board. “Retail is one of the product types that has problems that are more national in scope than office and industrial, which are based much more on regional economies,” Higgins says. “The borrowers who are in the market looking for loans are borrowers who have to be in the market,” he continues. “There’s nobody out there that’s doing a discretionary refinance of really any product type, but retail in particular.”

It’s hard to know what marks the bottom of the commercial real estate lending market. Whisperings in the industry point to 2010, though it could be sooner or much later than that. “When prices have fallen far enough, money will come back into the marketplace, both to lend and buy,” Higgins says. “The bad news will be the existing owners and the existing lenders will absorb losses based on that price adjustment. The good news will be capital will come back, and it will come back in a relatively robust fashion once the prices adjust.”

Economically, Memphis, Tennessee, stands as a city that doesn’t get hot and doesn’t run cold. This lukewarm history means that the recessionary slump experienced by major cities like Atlanta 6 months ago is just now reaching Memphis, says Danny Buring of The Shopping Center Group’s Memphis office.

“We’re a little bit slower to react, and we’re a little bit slower to recover. When times were booming, we trotted along at a pretty decent clip. When times aren’t good, we don’t crash and burn,” he says. The retail market is experiencing vacancy issues with big box tenants and problems with restaurants. And don’t even think about new developments. “Anything that was planned,” he says, “if leases weren’t signed, it’s not happening.”

Ridgeway Trace Center is under construction in Memphis.

Two projects in the Memphis area — Michael Lightman Realty Company’s Centennial Commons and the 335,000-square-foot Ridgeway Trace Center — are finishing up. Tenant-wise, a few retailers are still generating strong sales and are seen as safer bets than others. Target, Wal-Mart and grocery stores are all tenants that Buring says are weathering the recession admirably. But, as with most places, when questions about the impact of the recession on commercial real estate are asked, Memphis is hurting just like everyone else. “A lot of these questions, it doesn’t matter whether it’s Miami or Memphis,” Buring says. 

The Kendall retail market in South Florida is preparing for the delivery of a 700,000-square-foot lifestyle center at the end of this year. The Palms at Town and Country is a redevelopment of a 300,000-square-foot parcel that updated the façade, changing the look of the buildings to meld with a completely new 400,000-square-foot center. The new project, which broke ground in October, will feature a 35,000-square-foot Nordstrom Rack, a 26,000-square-foot Loehmann’s, three restaurant outparcels and room for  small-shop users. An 89,000-square-foot Kohl’s delivered in October.

Jim Padron of Coral Gables, Florida-based Flagler Development Group says the development is pushing through in a tough market because The Palms at Town and Country brings together tenants that have had success nationally. The project is not just a repeat of area stores.

“There’s no getting around that the market’s changed quite a bit,” he says. “We were able to line up the first two tenants prior to breaking ground. We had one tenant signed up, and the other one was far along in the negotiations. Both tenants work well even in a tough market. They’re more value-oriented retail.”

Flagler started moving on the development 2 years ago. With the benefit of hindsight, Padron says the company may have adjusted development plans a little or held off altogether until the recession blew over.

“If we had a crystal ball, I’m sure it wouldn’t have been a great to try to do that in this market. None of us have that crystal ball, and this started rolling in early 2007. The market was much better then. A lot of the retail around the lake was not performing,” he says.

From his place in Kendall, Padron can take the temperature of the entire market in South Florida. Different cities have reacted to the recession with varying success — Miami is still doing well on the retail side of things — but there are a few all-encompassing problems out there.

“Tenants are worried. They’re not sure what’s going to happen with their businesses. The national retailers, a big majority of them have pulled back and are very cautious and are not expanding,” he says. “The pool of tenants has gotten much smaller, but the amount of quality real estate for them to go to is not very large either. Our market’s very tight.”

Mid-Atlantic commercial real estate is all about the federal government. Money, jobs and construction projects radiate from Washington, D.C., and have impacted other areas in the region, such as Baltimore and Southern Virginia. “With the TARP money and everything else with the bailout, a lot has shifted to Washington because people follow where the money is,” says Geoff Mackler of H&R Retail’s Baltimore office. “A couple years ago, the money was on Wall Street; now, the money’s in D.C.”

That doesn’t mean, however, that retail in the area is booming. The same tenants that have left markets throughout the Southeast have left Washington, and the same tenants who are expanding are doing well in the area. Mackler points to PetSmart, Costco and LA Fitness as those in the expansionary mood. Mom-and-pop stores that don’t need to pursue financing in the current market are doing well. Considering the amount of Doomsday language in the media and the very real worries of tenants and landlords, Mackler sometimes sees a retail market that surprises him. “If you go out to restaurants in this area — I walk out there and am like, ‘Where’s the recession?’ You read all the negativity on the news, but everybody still seems to be busy. Sales are still strong,” he says.

Developers in the outlying markets are still struggling. Loudon County, Virginia, has seen several projects canceled. Many of these drew up plans for projects based on projected growth that hasn’t materialized, and some firms now have completed buildings on their hands with few tenants and no customers. Closer into the city, retail real estate is hanging in for the long haul, but tenants and landlords are not overly worried about the future.

“Retail’s very difficult right now,” Mackler says. “If you’re talking about convenience – nail salons, hair salons, liquor stores – I think that everybody’s doing OK. But if you’re talking about apparel – they’re getting killed.”

Business in Louisville centers around the healthcare industry. Growth in this sector is going strong, with other property types struggling to keep up. Retail, it seems, is still moving, but it certainly isn’t what it was before the recession

“Business, in general, isn’t as robust as usual,” says Rhonda Karageorge of Commonwealth Commercial Real Estate in Louisville. “Projects are getting approvals, but there just isn’t a lot of construction going on. Construction projects are either on hold or they’ve been scaled back or delayed.”

Many retailers aren’t interested in expanding or looking for new locations, so tenants who are out on the market are benefiting from a wider variety of space and lower rent prices. Karageorge lists a few retailers — Burlington Coat Factory, Target, Kohl’s, Walgreens, Wal-Mart, Goodwill — that have either just moved into new spaces or are waiting for something to deliver. Also, she adds, auto parts retailers are doing well because consumers are driving their cars for longer. She explains that retailers would be more active if financing was available.

“The money is frozen, and that’s probably been the biggest challenge for a lot of these projects that we have going on locally,” she says. “People are ready, but they’re being held up by the banks. Banks certainly aren’t lending for speculative projects either.”

One promising project is The Cordish Company’s expansion of its $72 million Fourth Street Live! project into the $250 million mixed-use Center City District. The city has already committed $24 million for the development, and Cordish will inject $200 million into the deal. The project will encompass six blocks and feature retail, office and residential space. In nearby Clarksville, Indiana, developers are looking to turn the former Colgate-Palmolive Plant into another mixed-use project. These developments are still a few years off, but are proof that an explosion of retail is on the horizon.

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