COVER STORY, MAY 2011

OUTLOOK GOOD?
Optimism shines through as the retail real estate business picks up.
Savannah Duncan

If you shook a Magic 8 Ball and asked, “How does the future look for retail real estate?” the response would be “Outlook good”. As business gradually begins to grow, retailers are increasingly optimistic that the effects of the recession are starting to wear off.

There are a few observations that seem to be true of the entire Southeast retail real estate market. Restaurant tenants are in high demand, more leasing is occurring than selling and retailers are hopeful for the future. While some parts of the Southeast are certainly fairing better than others, across the board business is on the rise.

“2011 is the year of the return of brokerage,” says John Crossman, president of Orlando, Fla.-based Crossman & Co. “[There are] new deals and more transactions; that’s a big deal. People’s confidence about the market overall is much different than last year. [There is] more optimism.”

In Orlando, national chains, particularly restaurants and non-traditional retail tenants, are thriving. Disney National Entrepreneur
Center, a 22,000-square-foot center located inside of Orlando Fashion Square mall, is expected to open this month. The Disney National
Entrepreneur Center contains a variety of business assistance organizations to promote the development and growth of small businesses.

“I think you’re going to continue to see what people would consider non-traditional retail tenants going into retail projects,” Crossman says.

Crossman says national tenants have started expanding again and seeking new sites. He cites the examples of Publix, Darden Restaurants and Planet Fitness as national companies that are growing in the Orlando market.

Lenore Reynolds, vice president of leasing at Bruce Strumpf, agrees.

“Last year the phone wasn’t ringing at all for local and even for national retail tenants,” she says. “Everybody was sitting on their hands because they wanted to see what would happen with the economy. No one was willing to make a move, including the larger chains. Then when the credit loosened up a little bit for national chains, there was such a pent up demand because they hadn’t opened up new stores for a couple of years. That’s what prompted them to move forward [when] they hadn’t done anything for a year or two.”

Reynolds also has the same opinion that in Orlando, restaurant tenants seem to be fairing the best. Local tenants, she says, are making a comeback as well, although their resurgence has been much slower.

Most of the activity in the Orlando market has been leasing, but Crossman says sales are picking up and starting to improve. He says that leasing rates vary depending on the area and the circumstances.

“Some landlords are staying firm and they should because the market’s matching that,” he says. “It certainly is more of a tenant’s market than a landlord’s market. There are a lot of great deals out there if you’re a tenant, some really interesting situations.”

Nashville, Tennessee, is one Southeast market where business is alive and well. Leasing activity has been strong and a couple of big developments are taking place there. David Baker, principal at Baker Storey McDonald Properties, thinks that because of the strong tourist draw, the recession didn’t hit Nashville quite as hard.

“What people expected during the last 24 months was a lot of foreclosure activity and people would buy up shopping centers at a bargain,” Baker says. “That really never happened. Properties that ended up going back to the lender are few. [We just haven’t had] the problems that some of the other markets have experienced.”

Construction has begun on the 1.2 million-square-foot Music City Center, a convention center in Nashville, Tenn.

There are two huge projects happening in Nashville at this time. The first is Music City Center, a new convention center under construction in downtown. The 1.2 million-square-foot center is expected to open in February 2013. Because of the size of the project and the draw it will have, retail space surrounding the center is in high demand.

“There is increased interest for all kinds of retail around the convention center,” says Nate Greene, managing partner at Colliers International’s Nashville office. “It’s an enormous project for [Nashville] and it’s going to change the landscape downtown for sure.“

The other project is the recently announced rebuilding of Opry Mills, a 1.2 million- square-foot mall that was flooded last year. The project is anticipated to open in the spring of 2012, adding millions of sales tax dollars back into Nashville’s economy.

Greene says that aside from these two developments, not a lot of new projects are slated to begin soon. However, leasing activity has been strong and he anticipates open spaces filling soon, driving leasing prices up and causing need for new developments to begin.

Another Southeast market fairing well is Washington, D.C. According to the 2010 U.S. Census, four of the top 10 demographic counties are located in suburban D.C., which makes it an ideal location for retailers.

“Everybody wants to be here,” says Andy Georgelakos, principal and managing partner for KLNB Retail’s Washington D.C. office. He says that high-end retailers and restaurants are flocking to the market because of their demographics and the rapid job growth in Washington D.C. Leasing rates have been high and landlords are holding firm to their rates.

Dimitri Georgelakos, principal and managing partner for KLNB Retail’s Vienna, Va., office says that while there haven’t been many new projects under construction, a majority of the projects that are currently in development are anchored by Wegmans, a supermarket chain. He predicts that during the next year several new development projects will be announced.

“The lack of development has really provided us with the unique opportunity to redevelop some existing centers with backfill,” Dimitri Georgelakos says. He says that national tenants such are Wal-Mart and Target are willing to accept non-traditional spaces in terms of size and design for the sole purpose of adding to their presence in Washington D.C. 

“The economy is building up speed,” says Andy Georgelakos. “Last year we were feeling the effects of the upturn and it’s just gotten even better this year.”

One market seeing slower improvement than the rest is New Orleans. Although the combination of hurricane Katrina and the economy made for a rough past couple of years, Rich Stone, senior sales and leasing associate for NAI/Latter & Blum Commercial New Orleans, says that tourist rates are picking up and the market is starting to return to normal.

“New Orleans is a little bit counter to national trends right now as we recover from Katrina,” he says. “I don’t see any major areas of danger in this market. We’re just going to continue to slowly grow and hopefully it gets better.”

On a whole, the Southeast seems to be well on it’s way to returning to normal. Across the board leasing rates are up, vacancies are down and retailers are optimistic that the future will bring more new developments as the market continues to pick up.

“[The retail real estate market is] going to have steady improvement and keep getting better but people need to keep pushing and working hard,” says John Crossman.

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