COVER STORY, MAY 2010

THE COMING RESURGENCE
Southeast retailers have found a new vitality.
Jon Ross

Dick’s Sporting Goods, Best Buy and Stein Mart will open this fall at The Forum at Madison Grandview in Madison, Mississippi.

May 2010 brings the beginning of yet another summer in a recession, but brokers around the Southeast are hopeful that this seemingly never-ending story will finally be over next year. In pockets throughout the region, the retail market is showing tentative signs of growth, and tenants all over are emerging with a stronger outlook.

Retail in Louisville is being bolstered by a $238 million downtown arena, which was branded the KFC Yum! Center on April 19. The new home of the University of Louisville’s basketball programs, the 721,000-square-foot property will open this fall in the central business district. Tenants like O’Shea’s, which is undertaking a $3.5 million renovation, and Eddie Merlot’s, which just signed a 15-year, 11,500-square-foot lease in the Fourth Street Live development, are flocking to downtown. “That arena is the catalyst for new retail projects. Restaurants are racing to open nearby, and there’s a lot of redevelopment going on in our downtown area,” says Rhonda Karageorge of Commonwealth Commercial Real Estate.

While downtown is the new “it” location, tenants are also growing throughout the metro area. The Fresh Market and IHOP have just opened new stores, as have Zaxby’s, Qdoba and Staples, which opened its sixth store in the area. By year-end, Goodwill will have opened three new stores. Karageorge points out that drug stores and auto parts stores are both doing extremely well in the down economy, but the tenants that might be doing the best during the recession are liquor retailers. Liquor Barn has paid $4 million for a site in Eastern Louisville, and other stores dealing in cigarettes and alcohol have been expanding and opening new sites. “When the economy is down, people drink and smoke more,” she says.

In spite of the retail growth, Louisville is still feeling the effects of the recession. Karageorge says retail commercial real estate is down more than 35 percent. Tenants are doing deals in the market, but they are taking less space, signing shorter leases and paying less rent. It’s also difficult to obtain capital, so even if people were anxious to pursue opportunities, the lack of financing makes it almost impossible. “Banks … if they are lending, they’re changing the underwriting and imposing these covenants that they’re giving lenders just way too much control over the borrower,” she says. “Retail has been down. Certainly, it could be worse.”

As with some of the other parts of the Southeast, tenants in Washington, D.C., have seen the muddled economic picture start to clear. Peter Mallios, director of retail services at Summit Commercial Real Estate, says more users are looking around for space, and when compared to last year, the number of deals getting done has amplified.

“There’s a lot of people with some money who have been sitting on the sidelines, and I think they’re just starting to say, ‘It’s time to get off the sidelines and start doing something.’ … That doesn’t mean they’re going to go out and spend $10 million buying a shopping center,” Mallios says, echoing the oft-repeated maxim that those active in the still-uncertain market are being cautious with their movements.

For buyers and sellers, it’s still too early to enter the unproven market. Buyers still think prices are too high, and sellers, because they perceive the market is on the upswing, don’t feel the need to lower their monetary expectations. As Mallios puts it, “Why sell if you don’t have to?” But the positive leasing trend felt in downtown Washington, D.C., will eventually help get sales moving again by simply creating a buzz in the marketplace.

 “As there’s more leasing, that helps everything — the vacancy rate starts to go down, and people who are thinking of selling, it makes it a little easier to derive a value of something that’s better leased,” he says.

Leasing momentum starts in the center of the city and starts to wane in the suburbs. The tertiary areas found at least 1 hour outside of the city are saddled with a vacancy in every center, Mallios says. Submarkets like Georgetown are current hotspots in the market, but still may have vacancy rates that, at first, raise some warning flags about the area’s real estate health. Mallios says that a recent sampling of the Georgetown area showed that the high vacancy rate was derived from empty buildings in less-desirable positions — space on side streets — or lower quality properties. When he looked at the prime corners and the best locations, they were all leased up. That trend tells him that even in the presence of low occupancy, tenants are still snatching up well-positioned real estate and keeping the market moving. 

While downtown, Georgetown and the area north of Massachusetts Avenue dubbed NoMa are handling the downturn quite well, the suburbs are underserved. In Landover, Maryland, work is continuing on the Woodmore Towne Centre, a 245-acre mixed-use development located at the interchange of Interstate 495 and Route 202. When fully built out, the project will contain 700,000 square feet of retail. In April, four new retail building permits were issued.  

With this ongoing project and smaller projects throughout the area, Washington, D.C., will emerge from the recession with a bang. Even D.C.’s ostensible trouble spots, like the relatively high vacancy rate in the metro area, aren’t a concern to Mallios. The city has a history of miniscule vacancy rates, he says, so any movement on that side looks more dire than it really is. “Business is still reasonably good,” Mallios says. “Even a modest increase in leasing activity would bring our vacancy rate to a real healthy level.”

No new development is planned in Memphis, Tennessee, but the city is actually relatively sewn up in the larger big box market. This low vacancy rate is seen particularly in sites with good locations. After the initial brunt of the recession passed and businesses using these large spaces were forced to close, new tenants came through looking for good opportunities.

“All the good boxes plus a handful of the good restaurant sites that came back on the market last year due to bankruptcies, consolidations, mergers, all those boxes have been picked up with the exception of one or two,” says Danny Burring of The Shopping Center Group’s Memphis office. “It’s becoming a very tight market for certain categories. Second-generation, well-located boxes are full; small space, however, is available.”

Tenants have also shown interest in some of the projects that are still being completed. Target has celebrated its 1-year anniversary at Weingarten’s Ridgeway Trace development, a 300,000-square-foot center located at the corner of Poplar Avenue and Interstate 240. Work is almost finished on the three other anchors — Best Buy, Sports Authority and PetsMart. At Michael Lightman Realty Co.’s Centennial Commons, Office Depot will be delivering any day, and Toys “R” Us is predicted to open late this year. The center, which is in southeast Memphis, already houses JC Penney, JoAnn Fabrics and Dick’s Sporting Goods.

One product type that hasn’t seen activity is the smaller centers that were built up during the development heyday. Developers built them up almost on top of each other, and now nobody’s interested in them. Burring estimates that Memphis is seeing a 25 percent vacancy rate among unanchored retail centers. 

Memphis, like the rest of the country, is hurting, but Burring believes the area’s smaller size worked to its advantage during the recession. Brokers in Memphis weren’t dealing with astronomical vacancy rates simply because there wasn’t a vast amount of properties to begin with. “What’s happening here and what we’re going to see here is no different than every other market in the Southeast. We probably didn’t explode as fast as Atlanta or some of the Florida markets, even, for that matter, Nashville,” Burring says. “But we also didn’t grow population-wise at those rates, either.”

Activity in Mississippi revolves around Mattiace Properties and its retail projects. The firm has been busy developing retail on the south side of Highway 463 in Madison. Dick’s Sporting Goods, Best Buy and Stein Mart recently began construction at The Forum at Madison Grandview; the tenants are scheduled to open their doors in November. Additional retailers — a pet specialty retailer, a junior apparel anchor and a home store — are planned to flesh out the property’s 250,000 square feet of retail space. In the future, a lifestyle component with 40,000 square feet of retail space will be added, and Mattiace is looking to develop restaurant outparcels and a hotel site nearby. JBHM Architects designed the project, which is being built by Birmingham, Alabama-based Hoar Construction.

In nearby Ridgeland, Mississippi, Mattiace recently celebrated the second anniversary of Renaissance at Colony Park with the addition of four new tenants. Coldwater Creek, Hearron Fine Gifts, Sand Dollar Lifestyles and Sephora have been completed at the lifestyle center, which is located on Highland Colony Parkway in Ridgeland. The development is currently in the second phase, which will bring Renaissance at Colony Park to approximately 500,000 square feet of space when completed.

Many issues in the Southeast retail market will only be worked out as time passes, but, as the season starts to heat up, brokers around the area are hopeful for the future of retail real estate.

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.