Retail Property Market: Half Full or Nearly Empty?

Retail Property Market: Half Full or Nearly Empty?

By Sean Roth

Real Estate Editor

The real estate market, like most things in life, is a matter of perspective.

So it was no surprise to hear the several hundred developers and landlords who gathered for the International Council of Shopping Centers' 2006 West Florida Idea Exchange in Palm Harbor talking both views of a slowdown in real estate appreciation.

Discussing the West Coast market's retail opportunities, the overall theme of several speakers was: Don't be overly fearful - there are still good deals out there- but make sure you do your homework first.

Marty Engelmann Jr., principal at Tropical Retail Appraisal Services, Tampa; John Crossman, principal at Trammell Crow Co., Orlando; and Skipper Peek, managing partner of Pinnacle Realty Advisors LLP, Tampa, all offer an overall cautious outlook toward the market.

"The [analogy is] the speed limit is 75, and we've been going 150," Engelmann says. "If we slow to 125 or even 100 that's a good thing. It will allow us to manage the growth more responsibly. It should not be feared."

Collectively, the three feel the biggest positive indicator for future retail opportunities is the continued population growth in the area and across Florida. Crossman cites the U.S. Census Bureau projection that by 2011, Florida will surpass New York as the third most populous state and should hit 29 million people by 2030.

Engelmann says major growth and development is occurring over the entire west coast.

As growth continues to sprawl out, he says, he expects that more retail will move into Sumter and Citrus counties, because of the availability of land and the growing residential population in those counties.

On top of population, Florida and the Gulf Coast region are ahead of the nation in job growth. Engelmann's research shows that Florida adds 400,000 new jobs a year, while unemployment in the Gulf Coast hovers near or below the 3% mark, significantly lower than even the state rate.

"People are coming here from the Midwest because they can afford to buy a home here and get a job," Engelmann says. "People will keep wanting to come here."

However, most other indicators have a negative outlook. Interest rates are much more likely to increase than to decrease. A lot more financial capital has been in real estate because of the anemic returns generated by bonds and the stock market, and if that were to change it could affect values. Construction costs and impact fees have increased considerably as have land prices.

Further, Peek thinks that given the current conditions, capitalization rates (net operating income divided by the present value of the property) will increase, requiring rents to rise, while profits stay the same or fall.

Peek suggests that given the increase in negative trends recently there may be more cases of "deal paralysis" as both buyers and sellers adjust to the different market. Peek goes so far as to imagine the "unthinkable" of a leveling off or even a slight decline in land prices.

On the other side of the deal, Engelmann worries that retail tenants may be getting overextended financially and may not be able to handle rent increases. He is also concerned that the bump in interest rates could have a much larger effect on retailers because of its impact on consumer buying power.

"For a homeowner with an interest-only loan, an increase of 4% to 6% reduces their discretionary income by 2%," Engelmann says. "That's money that isn't available for them to spend at a retail center."

Crossman and his company, Trammell Crow, suggest that shopping center owners should consider selling their positions now, principally because of the property appreciation to this point.

"The great times we are experiencing are an excellent opportunity to prepare for potential tough times ahead," a market report compiled by Trammell Crow states. "Right now we are at record highs so it is time to consider selling."

But if you decide to hold, Crossman says, you need to have a plan for the future of your shopping center. What if you lost your anchor tenant; where would you be? What is it going to take to close any vacancy gap? Are your leases landlord-friendly? Can the facility be improved physically or is there any potential to modify it as mixed use?

His advice to potential buyers of retail property is similar - think of all the angles.

Crossman suggests it may be a smart time to look for second-tier properties that can be improved. For example, he says "hairy" deals have significantly fewer potential buyers - up to 90% smaller than for a typical deal - meaning the potential is there to get a steal.

"Look for things like a dark anchor where you can quickly make a large improvement," Crossman says. "But where the fundamentals are strong."

CONSUMER MIND READERS

Six-year December Comparative

The percentage is the number of people who said they shopped at that store at least once that month.

Category Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05

Discount Stores 89.7% 90.3% 89.5% 91.7% 91.3% 92.7%

National Department Stores 57.6% 49.7% 40.4% 38.9% 49.3% 47.3%

Major Department Stores 32.3% 34.6% 22.5% 27.3% 21.3% 33.5%

Home Improvement Stores 30.1% 26.6% 29.1% 21.2% 22.5% 27.2%

Hardware Stores 11.2% 12.9% 18.8%

Appliance Electrical Computer Stores 32% 28.3% 27.2% 35.4% 31.5% 39.2%

Apparel Stores 31.7% 19.9% 27.3% 24.9% 19.6% 20.2%

Discount Apparel Stores 30.9% 30.5% 40.4%

Book Stores 26.7% 32.9% 30.3% 19.6% 22.5% 28.5%

Christian Book Stores 10.4% 12.2% 17.3%

Bed & Bath Stores 13.4% 16.6% 20.9% 22.3% 17.7% 19.2%

Membership Wholesale Club 24.8% 28% 25.2% 22.6% 25.4% 31.1%

Home Accessories Stores 10.4% 11.9% 13.1% 11.3% 12% 13.7%

Garage Sales/Flea Markets 15.2% 15.7% 18.7% 8.6% 11.9% 12.2%

Sporting Goods Stores 19.6% 19.7% 21.9% 20.6% 15.3% 21.4%

Drug Stores 60.3% 60.6% 60.5% 55.9% 52.1% 55.2%

Auto Parts Stores 16.4% 13.6% 22.3% 11.3% 13.3% 15.6%

Shoe Stores 17.5% 20.7% 19.2% 15.7% 14.2% 15.8%

Furniture Stores 9.4% 8.4% 10.1% 5.4% 7.3% 6.9%

Catalogs 8.9% 13.2% 17.7% 10.4% 14.6% 11.6%

Music Stores 24% 24.1% 29.3% 18.9% 15.9% 23%

Musical Instrument Stores 7% 5.4% 5.9%

Toy Stores 38.6% 41.7% 31.6% 43.2% 30.6% 39.5%

Jewelry Stores 12% 15.6% 14.1% 15.6% 14.9%

Outlet Mall/Factory Outlets 10.3% 11.4% 9.1%

Internet 15% 15.2% 18.8% 21.3% 27.1% 31.8%

Spending during the month

The amount of money people said they spent at that store at least once that month.

Category Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05

Discount Stores $165.82 188.99 $179.31 $211.44 $221.14 $244.46

National Department Stores $90.48 $92.88 $64.18 $88.28 $92.05 $95.74

Major Department Stores $46.91 $59.04 $28.38 $35.79 $31.74 $60.07

Home Improvement Stores $32.35 $35.07 $32.73 $23.41 $28.79 $43.76

Hardware Stores $8.19 $12.43 $16.78

Appliance Electrical Computer Stores $61.83 $49.84 $47.58 489.80 $67.52 $88.80

Apparel Stores $28.91 $23.33 $25.64 $21.03 $19.46 $28.61

Discount Apparel Stores $34.82 $30.54 $49.73

Book Stores $11.34 $21.29 $15.15 $11.92 $14.30 $17.37

Christian Book Stores $7.51 $9.28 $11.34

Bed & Bath Stores $7.80 $15.88 $14.88 $21.40 $15.62 $14.56

Membership Wholesale Club $31.51 $43.43 $32.26 $31.96 $41.57 $54.31

Home Accessories Stores $6.94 $14.60 $9.38 $11.08 $11.74 $12.50

Garage Sales/Flea Markets $6.53 $12.80 $9.07 $4.46 $8.45 $6.33

Sporting Goods Stores $15.52 $27.36 $20.46 $19.18 $16.24 $21.71

Drug Stores $25.82 $40.17 $34.46 $33.09 $30.94 $30.70

Auto Parts Stores $8.89 $14.44 $18.57 $7.86 $10.71 $10.75

Shoe Stores $11.32 $15.81 $13.54 $13.00 $10.03 $11.11

Furniture Stores $44.43 $40.60 $30.82 $26.66 $35.20 $34.05

Catalogs $8.79 $15.79 $21.99 $12.66 $17.46 $16.15

Music Stores $9.04 $15.85 $21.33 $9.04 $9.47 $13.62

Musical Instrument Stores $10.81 $6.15 $6.61

Toy Stores $47.16 $54.89 $31.76 $55.48 $42.27 $55.19

Jewelry Stores $32.43 $26.41 $38.87 $40.59 $36.69

Outlet Mall/Factory Outlets $11.64 $11.53 $13.78

Internet $32.28 $28.69 $26.31 $27.78 $52.79 $61.81

Note: National survey based on dollar ranges and averages.

Source: C. Britt Beemer