Retail is Alive (Really!)

Retail is Alive (Really!)

Reports of the death of Florida retail are

greatly exaggerated. For now, an objective look at commercial real estate vacancies and rents doesn't show widespread distress.

COMMERCIAL REAL ESTATE by Jean Gruss | Editor/Lee-Collier

Retailers probably feel like that poor man in Monty Python's Holy Grail movie who yells out to the incredulous collector of dead bodies: "I'm not dead yet!"

Not a day goes by without news of one retailer's disappointing results or another's halt to expansion plans. If even Starbucks closes a bunch of locations, things must be really bad. Certainly, it's no secret that taxable sales on the Gulf Coast have dropped by double-digit percentage rates from year-ago levels.

But the doom and gloom may be overstated.

Consider commercial space that retailers fill, an important gauge of America's shopping passion. In the Tampa Bay area, 94.7% of shopping space was full in the second quarter of this year, according to market tracker CoStar Group. In the Charlotte, Lee and Collier areas, 94.8% of the space was occupied. Average quoted asking rental rates in the Tampa Bay area are up 1.9% from a year ago and up 2.3% in the Southwest Florida area, CoStar reports.

This isn't exactly a sign of major economic distress. For that to be a worry, vacancy rates would have to be well above 10% and for now they're about half that.

"It's not horrible," says David Conn, executive vice president with CB Richard Ellis in Tampa. "I don't expect vacancy rates to rise significantly," he says.

Here's why Conn and most observers think vacancy rates won't rise too much higher: Unlike previous downturns, there hasn't been rampant overbuilding of commercial retail buildings during the boom. There are a few noted exceptions, of course, but most of the space built in the last few years was leased before construction started.

"We never had a huge glut of space on the market," says Patrick Berman, a retail specialist with Cushman & Wakefield in Tampa.

"There's been nothing of consequence built here in years," says Stanley Rutstein with Re/Max Alliance Group in Bradenton. Meanwhile, the population growth has attracted retailers and that's kept the vacancy rate in the Sarasota-Bradenton area to 4.1%, according to the latest CoStar data.

There are a few exceptions where construction has been more exuberant. In response to an untimely tripling of taxes on new construction by Lee County commissioners last year, developers rushed to build commercial space to beat the sharp increase.

That happened mostly in south Lee County, near two malls totaling nearly 3 million square feet of space.

But even there, observers don't think the problem will last long. "The problems that we think we see in south Lee are not problems but normal parts of the cycle, exacerbated by government," says Gary Tasman, broker with Cushman & Wakefield in Fort Myers.

Demand from thrifty brands

While the supply of new space has been somewhat limited in most areas of the Gulf Coast, demand has dwindled. The few tenants looking for space can get concessions such as free rent and money for building the interior of their stores.

"Retailers are being very finicky with regard to their site selection," says Karen Johnson-Crowther, principal and director of retail services with Colliers Arnold in Fort Myers. "They're asking landlords to be extremely aggressive with concessions."

Fact is, many national retailers rushed in with the housing frenzy. "They're already here, they've got their spots, they're done," says Johnson-Crowther. "The retailers in Florida are not going to expand the way they were," says Conn. "Everyone is kind of sitting on their hands."

But that doesn't mean leasing has come to a full stop. "I'm still doing transactions," says Johnson-Crowther. In fact, a new crop of retailers is growing because of increasingly thrifty consumers. Discount chains such as Dollar Tree, Ross Dress for Less, Dollar General, Marshalls, TJ Maxx and Kohl's are all expanding.

These and other retailers want locations with proven population numbers, not pie-in-the-sky projections from homebuilders. They want well-established neighborhoods instead of the next suburban ring.

"They want to see the car in the driveway and the bicycle in the front yard," says Steve Althoff, senior vice president with The Sembler Company in St. Petersburg.

That's why so-called "in-fill" locations are the hottest locations for retailers now. Shopping centers in well-established neighborhoods in Tampa and Sarasota are in demand.

For example, Boca Raton-based Woolbright Development recently renovated the 71,000-square-foot Cascades Shopping Center in Carrollwood, the residential area that straddles North Dale Mabry Highway in Tampa.

It replaced the outdated wood-shingle façade with stucco and added brick, stone and crown-molded columns. The center, renamed Carrollwood Village Shoppes, has 260,000 residents living within five miles and the average household income is more than $67,000 for those who live within three miles, Woolbright says.

Meanwhile, grocery stores and drug stores are still growing. They're what brokers and developers call necessity retail. "There are a whole lot of people who live in Florida," says Althoff. "We still go to Publix and Target, Subway and Radio Shack."

Controlled supply

The Sarasota-Bradenton area is the largest submarket in the Tampa Bay region with 48 million square feet of retail space, according to CoStar. But despite its size, very little large retail construction has taken place in recent years. For example, only a tiny 57,891 square feet is under construction now.

With so little new construction and the growth in population, the retail vacancy rates in the Sarasota-Bradenton area are among the lowest on the Gulf Coast. "Sarasota is well known to be very demanding, so it's tougher to get things approved," says Berman. "If you restrict supply, you increase its value."

That doesn't mean developers don't try. Michigan developers Taubman Centers and The Forbes Co. recently joined Sarasota-based Benderson Development to build a new regional mall in Sarasota.

The 900,000-square-foot center will be part of a 276-acre mixed-use project anchored by Nordstrom, Neiman Marcus and Macy's. It's scheduled to open in November 2010.

"That's almost like a small city they're building there," says Berman.

"The majority of it will be pre-leased before they open the door," predicts Rutstein. "The market is growing, so you're getting more retailers."

Commercial developers aren't known to be a disciplined bunch, but their more conservative ownership has held them back in the recent housing boom. A large percentage of the prime retail space is owned by real estate investment trusts, which are publicly traded real estate ownership and management companies, as well as pension funds and insurance companies. "They're risk-averse, long-term holders," Althoff says.

That conservative growth will pay off in the slowdown and when the recovery inevitably returns.

REVIEW SUMMARY

Industry. Commercial real estate

Trend. Retailers aren't vacating commercial space in large numbers.

Key. The most desirable locations are now in well-established residential neighborhoods, not distant suburbs.

BY THE NUMBERS

GULF COAST RETAIL

In general, commercial retail space shows relatively healthy occupancies as retailers stick out the economic downturn. What's more, developers didn't overbuild retail space the way they did during the last cycle. Here are details on markets along the Gulf Coast courtesy of market tracker CoStar Group.

Tampa Bay area

Existing YTD net Quoted rent

Area space (sq.ft.) Vacancy absorption ($ per sq.ft.)

Sarasota-Bradenton 48.2 million 4.1% ‑165,491 $17.36

Pinellas 46.6 million 5.5% ‑124,144 $16.82

North Hillsborough 37.4 million 6.8% ‑56,446 $17.85

East Hillsborough/Polk 24.3 million 5.5% $13.33

Interstate-75 18.5 million 4.6% 25,218 $16.54

Central Tampa 15.1 million 4.7% ‑46,635 $18.78

Southwest Florida (Charlotte, Lee, Collier)

Existing YTD net Quoted rent

Area space (sq.ft.) Vacancy absorption ($ per sq.ft.)

South Fort Myers/San Carlos 17.2 million 3.9% 249,835 $20.36

North Naples 10.7 million 6.2% 274,838 $27.63

Cape Coral 9.5 million 3.9% ‑77,865 $19.11

Charlotte County 9.5 million 4.4% ‑133,695 $16.94

City of Fort Myers 7.5 million 5.4% ‑131,245 $16.19

Estero 4.2 million 6.4% 110,773 $24.96

East Naples 4 million 5.5% 20,791 $16.21

Bonita Springs 3.6 million 11.1% ‑131,304 $18.88