COVER STORY, MAY 2012

REVISITING RETAIL
Cities in the Southeast experience uptick in retail activity as recovery continues.
Savannah Duncan

The retail market in the Southeast continues to gain momentum as the middle of the year approaches. Retailers have started expanding again, causing vacancy rates to begin to fall in several markets, and landlords are gaining back leverage in lease negotiations. Lenders are more open to financing acquisitions and even new development in some cases. While speculative development remains on hiatus, redevelopment activity is very much alive. Southeast Real Estate Business spoke with brokers, lenders and developers in Baltimore; Miami; New Orleans; and Nashville and Chattanooga, Tennessee, to find out how their retail markets are faring.

Baltimore

In March, Target opened a 137,000-square-foot store at Waugh Chapel Towne Center, a mixed-use development located in Gambrills, Maryland.

Baltimore is attractive to retailers for several reasons, including the strength of the job market, proximity to Washington, D.C., and relatively low rental rates compared to bigger East Coast markets such as New York and Boston.

“The overall retail market in metropolitan Baltimore is reasonably strong, especially in the city of Baltimore,” says David Cordish, chairman of Baltimore-based The Cordish Company. “We are more active today than at any time in our 100-year history.”

The vacancy rate for neighborhood and community shopping centers in Baltimore for the first quarter of 2012 was 7.4 percent, down slightly from 7.6 percent in the fourth quarter of 2011, according to New York City-based Reis.

Several tenants are expanding in the market or looking for new locations, including PetSmart, Target, Wegmans, Shoe City, CVS/pharmacy, Walgreens and Michaels.

Nancy Ferrell, managing director of NorthMarq Capital’s Baltimore office, says Lululemon, Anthropologie and South Moon Under have all signed leases in the Inner Harbor East submarket. Last December, grocer Harris Teeter entered Baltimore with a 61,000-square-foot location at McHenry Row. In June, Wegmans plans to open a 135,000-square-foot store at Snowden River Parkway and McGaw Road in Columbia, Maryland.

“Appetite for tenant expansion is here, and with the few developments that are going on, pre-leasing has been strong, which is proof of tenant demand [for new space],” says Geoffrey Mackler, principal of Baltimore-based H&R Retail.

For new development, Ferrell says construction loan amounts average between 80 and 85 percent of costs. Lenders require new construction to have a signed anchor tenant and approximately 60 percent of the inline space pre-leased.

General Growth Properties and Kimco Realty have formed a joint venture to redevelop the 1 million-square-foot Owings Mills Mall, located in northwest Baltimore County. Preliminary plans, which were released in November 2011, include a new format and tenant mix, as well as possible addition of exterior facing retail, junior boxes, big boxes and department stores.

In March, a 137,000-square-foot Target opened at Greenberg Gibbons’ Waugh Chapel Towne Center, a $275 million mixed-use development in Gambrills, Maryland. Upon completion, the development will include 650,000 square feet of retail space. Dick’s Sporting Goods and Petco have opened at the center as well. Additionally, a 140,000-square-foot Wegmans will open in October and several other tenants will be opening throughout the year.

Miami

Miami’s retail market is thriving, thanks to the strong presence of tourists, as well as the wealthy, who have selected Miami as the perfect location for a second home. Retail property sales have picked up, with multiple transactions surpassing the $10 million mark.

“The retail market in Miami is heating up like a firecracker,” says Jeremy Larkin, president of NAI Miami. Tenants such as AutoZone, Publix, hhgregg and Burlington Coat Factory have been expanding in the market.

According to Reis, Miami’s vacancy rate in the first quarter of 2012 was 7.7 percent, up slightly from 7.6 percent in the fourth quarter of 2011.

“There’s more activity in terms of tenants out looking to expand and open new stores, so that’s a good sign,” says Larry Suchman, president of Coral Gables, Florida-based Suchman Retail Group. “At our centers, we’re signing leases and seeing rental rates in the better areas be sustained or get better.”

Larkin says that in the outlying areas of Miami, tenants still have the upper hand in lease negotiations, but in the more developed, high net income areas, control is back in the hands of the landlords.

“It’s going to become a landlord’s market again very quickly,” he says. “I would expect a 10 to 15 percent rent increase by the end of the year, or the first quarter of next year.”

Without a doubt, the increase in sales activity has been the leading story in Miami during the past several months. Jason Shapiro, managing director of Miami-based Aztec Group, says that for acquisitions, loan-to-

values are generally in the 70 to 75 percent range, compared to the 65 to 70 percent range at this time last year.

“We did two transactions with local banks on unanchored shopping centers in Miami where the bank did a 10-year, fixed-rate loan at about 5 percent non-recourse, which is something you don’t usually see with a local bank,” he says.

In October 2011, Equity One acquired the 113,450-square-foot Aventura Square, located in Aventura, Florida, a northern suburb of Miami, for $55.5 million. Old Navy, DSW and Bed Bath & Beyond anchor the center.

Kimco Realty Corp. purchased the 112,424-square-foot Park Hill Plaza, located in Miami, from an affiliate of Terranova for $25.45 million. Winn-Dixie anchors the center, which was 98 percent leased when the property sold in September 2011.

Even smaller, multi-tenant buildings in certain areas of Miami, including South Beach, are selling for relatively high dollar amounts. In December 2011, a New York City-based investor paid $13.15 million, or $823 per square foot, for a two-tenant building located at 801 Washington Street in South Beach. The 15,975-square-foot building is fully leased to Diesel Jeans and DASH Miami.

Chattanooga

In December 2011, CBL & Associates completed a major renovation at the 1.17 million-square-foot Hamilton Place in Chattanooga, Tennessee.

Consumer confidence is up in Chattanooga, thanks in part to the construction of several large distribution and manufacturing facilities for major national companies such as Volkswagen and Amazon, which continue to add new jobs to the area.

Chattanooga did take a hit with retailers like Books-A-Million, Food Lion and Blockbuster exiting the market, leaving behind big box spaces that have yet to be filled. Chattanooga’s vacancy rate jumped from 11.3 percent in the second quarter of 2011 to 12.6 percent in the third quarter, according to Reis. However, in the first quarter of 2012, it fell slightly to 12.5 percent.

In spite of several big box spaces sitting empty, Cullon Hooks, associate broker of Grubb & Ellis/Hudson Cos., says several restaurant concepts have either expanded or opened new locations in Chattanooga.

“Five Guys Burgers and Fries is coming to downtown, Logan’s Roadhouse has built a new restaurant on Interstate 24 and Zaxby’s is expanding,” he says.

“There seems to be quite a bit of optimism in the market right now,” says Lee Harper, principal broker and managing director of Chattanooga-based Grubb & Ellis/Hudson Cos. “We are seeing some positive signs in the retail sector.”

Last spring, Forever 21 entered the market with its new 60,000-square-foot store at CBL & Associates’ Hamilton Place Mall in Chattanooga. At the end of 2011, the company completed a major renovation at the 1.17 million-square-foot center, which included a full remodel of the interior, upgraded entries and new parking lots.

“Hamilton Place’s sales are just over $400 per square foot, up approximately 7 percent year-over-year,” says Michael Lebovitz, executive vice president of development and administration of CBL & Associates.

In October 2011, CBL & Associates acquired the 823,000-square-foot Northgate Mall, located in Chattanooga, for $11.5 million. Lebovitz says the company is currently working on some light renovation work inside of the center, and hopes to improve the tenant mix with some new big-box tenants.

For acquisitions of well-occupied, Class A properties, borrowers can expect to receive 75 percent loan-to-value at an interest rate of approximately 5 percent with a 30-year amortization schedule, says Jimmy Board, senior vice president of capital markets and real estate banking, based in Jones Lang LaSalle’s Houston office.

“For any quality real estate transaction in a secondary market, there’s a lot of capital available, primarily through the CMBS market,” Board says. “The CMBS market has tightened 150 basis points, if not more, since December of last year.”

Hooks says the retail market in Chattanooga should continue to trend positive. “The retail outlook looks good over the next couple of years,” he says. “Chattanooga is on the map as far as people relocating here. It’s just a great place to live.”

Nashville

While there is increased optimism in Nashville, the retail market seems to be slowing on the leasing front. The vacancy rate in the third quarter of 2011 was 8.4 percent, and fell to 7.9 percent in the fourth quarter. However, it remained unchanged at 7.9 percent in the first quarter of this year with zero net absorption, according to Reis.

Jimmy Granbery, CEO of Nashville-based H.G. Hill Realty Co., says there has been an uptick in development activity. “There is a lot of new construction with creditworthy tenants that make the deal financeable,” he says. “Plus, smaller merchants want to follow grocery stores.”

For development purposes, loans are typically 24 months interest-only, which are later converted to a 3- to 5-year mini permanent loan with a 25-year amortization schedule, says William Glaus, executive vice president of commercial real estate at Nashville-based The Bank of Nashville. “For new development, even with a grocery anchor, pre-leasing is a requirement,” he says.

Granbery says H.G. Hill has been active on the redevelopment front. The company has been backfilling vacated grocery anchor spaces with a variety of tenants. For instance, the company recently combined a former grocery store and a vacant drugstore and then split the space in half, Granbery says. One half became a Save-A-Lot and the other a Family Dollar.

Carnell Scruggs, managing director of Nashville-based Sperry Van Ness/The Genesis Group, says discount retailers, such as Family Dollar, are still active in the market.

In Nashville, sales activity has stalled because there’s a disconnect between the price points that sellers want and what buyers are willing to pay, Scruggs says. However, he adds that on the institutional side, there is pent-up demand for Class A properties.

The largest sale in recent months was San Diego-based Excel Trust’s $31 million purchase of the 469,600-square-foot Crossings of Spring Hill, sold by Brentwood-based GBT Realty Corp. The center is located in Spring Hill, 30 miles south of Nashville.

Without a doubt, the biggest coup for the Nashville retail market is the re-opening of Simon Property Group’s 1.2 million-square-foot Opry Mills mall. The center, which flooded in May 2010, opened its doors again in March.

New Orleans

Stirling Properties broke ground in April on the 107,000-square-foot Mid-City Marketplace, located in New Orleans.

In the first quarter of this year, the vacancy rate in New Orleans remained unchanged from the previous quarter at 11.3 percent. However, national retailers are entering the market or expanding in the market, and development activity has started to make a return.

“We had various projects and phases at shopping centers that had been started years before the recession hit that had not been completed,” says Marty Mayer, president and CEO of Covington, Louisiana-based Stirling Properties. “In the last year and this coming year, we have a number of those under way.”

The company broke ground in April on the 107,000-square-foot Mid-City Marketplace, a Winn-Dixie-anchored center in New Orleans. “It is a project that has been in the works for about 2 years and construction has just now started,” Mayer says. “Bringing back retail is a very high priority in New Orleans.”

Additionally, Mayer says the company has added several tenants, including Chuck E. Cheese and Charming Charlie, to River Chase, a 253-acre, mixed-use development located in Covington. Sam’s Club is scheduled to open a 136,085-square-foot store at the development this September.

Larry Rabin, director of New Orleans-based Corporate Realty’s retail division, says the suburbs are experiencing some development activity as well. According to the St. Tammany News, Birmingham, Alabama-based Bayer Properties will break ground this summer on the 400-acre Summit Fremaux project, which will include a 375,000-square-foot retail center. Michaels, Dick’s Sporting Goods, Best Buy, T.J. Maxx, Versani Jewelry and Rack Room Shoes have all signed leases at the center, which is slated for completion in fall 2013.

John Sibal, president and CEO of New Orleans-based Eustis Commercial Mortgage Corp. says that there are some lenders who will provide combined construction, and permanent financing for a well-located, substantially pre-leased project with a strong anchor tenant.

“These loans generally provide for 12 to 18 months of interest-only [payments] with a permanent loan that amortizes following that,” he says. “Generally, loan-to-value is 70 to 75 percent with interest rates similar to those for stabilized properties.”

Rabin adds that while development is thriving in some parts of the city, areas such as uptown and eastern New Orleans — where Hurricane Katrina hit in 2005 — are still suffering. However, Walmart plans to open a 180,000-square-foot store in eastern New Orleans in fall 2013.

For the remainder of 2012, Mayer anticipates a continued increase of development and leasing activity. “The rest of the year will be about the same as it has been, which is active,” he says. “The wild card is the election and what happens beyond that.”

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