Naples protection bubble

Naples protection bubble

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

Naples was spared the overbuilding of shops that occurred in other areas of the Gulf Coast, and retail sales have not declined there as sharply. Is Naples immune to the retail downturn?

Is Naples in a world of its own?

The retail sales and commercial-real-estate data seem to indicate the wealthy enclave at the Southwest tip of Florida is better off than almost every other areas of the Gulf Coast.

For one thing, Naples' $49,000 median household income is the highest of any county on the Gulf Coast, according to the U.S. Census.

"Here, in the Naples area, it's a trickle-down economy," says Dougall McCorkle, senior vice president of commercial real estate with Lutgert Cos. that is developing a 53-acre mixed-use development called Mercato. "Those folks are a little more insulated than anybody else."

The economic recovery will begin precisely on Feb. 12, 2009, McCorkle jokes. That's when Mercato's grand opening will coincide with the end of the recession. Mercato's roster of tenants includes health food supermarket Whole Foods, shops such as Jos. A. Bank and Sur La Table, restaurants such as The Capital Grille and McCormick & Schmick's and the offices of Merrill Lynch.

At the upscale Waterside Shops in Naples, the Forbes Co. has refocused the center toward a wealthier clientele, which so far has served it well. Shops include Gucci, Hermes and Louis Vuitton. "For the first five months, comparable-store sales have been in the double digits," says Nathan Forbes, managing partner of The Forbes Company. "On a center-wide basis, we're happy where we are."

Naples has a track record of skirting economic downturns. "If you go back to the early '90s and talk to the people who went through those times, they will tell you it seemed that Naples was one of the last to be hit and one of the first to recover," says James Nashman, president of Pelican Bay Development in Bonita Springs.

The fact that Naples is so well off stands in sharp contrast to Bonita Springs, its South Lee County neighbor and a mere dozen miles away to the north.

While retail vacancy rates have crept up to about 15% in Naples when you include new construction, they're close to 50% when you account for all the speculative building occurring in Bonita Springs, says Charlene Greenblatt, a commercial real estate broker with Colliers Arnold.

Anti-growth moat

Ironically, Collier County's and Naples' anti-growth government has kept the area from the excesses of overbuilding that its more pro-growth neighbor Lee County experienced. According to the Southwest Florida District Chapter of the CCIM Institute, a recent survey revealed developers were building 2.3 million square feet of retail space in Lee County compared with 849,373 square feet in Collier.

Collier County has the highest taxes on new construction in the state and its permitting process is snail-like. Those things combined with the high cost of land have served as a sort of economic moat that has given longtime local developers like Lutgert the upper hand.

For example, Mercato is a joint project by Lutgert with Barron Collier Cos. Barron Collier has owned the 53 acres at the corner of U.S. 41 and Vanderbilt Beach Road for years, its low basis giving it a huge competitive edge over any competitor. Rents don't have to be nearly as high as the $50 to $70 per square foot net of expenses that retailers pay in some of the most desirable streets in Naples. McCorkle says rents at Mercato range from the low $20 range for large spaces to $60 for a few small spaces in premium locations.

The result of much of the anti-growth sentiment in Collier County means fewer shops for Naples residents. Just four years ago, there was such a lack of dining options that residents had to wait for two hours to eat at the local Outback Steakhouse restaurant, says Greenblatt. That has been alleviated somewhat by the four dozen restaurants that have opened since then, but Greenblatt says Naples retail is roughly in balance with the population.

"We were probably one of the most underserved markets in the United States," Greenblatt says.

Meanwhile, developers built two new malls just north of the county line in Lee last year with enough shopping space to fill 53 football fields. Initially, those malls impacted Naples retailers but the novelty quickly wore off. "For the most part [Naples consumers are] keeping their dollars in Naples," Greenblatt says.

Building the Mercato

Not a day goes by without news of some retailer deciding to close stores or shelve plans for new locations. In this environment, it may be surprising to see any new retail development take place.

At least one developer has canceled plans for a mixed-use development called Renaissance Village near tony Fifth Avenue in the heart of Naples. Developer Jack Antaramian now is in talks with the city to sell the parcel to the municipality. Last year, Antaramian sold his portfolio of seven retail and residential buildings on Fifth Avenue to New York-based investment firm BlackRock for $77.5 million in cash, one indication the market had reached its peak.

Antaramian couldn't be reached, but McCorkle says condos were a much more significant part of Renaissance Village. Antaramian had planned to sell 300 condos and lease 205,000 square feet of commercial space. At Mercato, by contrast, Lutgert only planned 92 condos in its first phase and has presold about one third of those. It is building 330,000 square feet of shops and restaurants and 140,000 square feet of offices.

McCorkle says the biggest challenge hasn't been finding new tenants but getting financing for the project during these times of tight credit. "Financing has been a huge obstacle," McCorkle says. But Lutgert has preleased enough office and retail space and presold enough condos to obtain financing from lead bank Wells Fargo for the $300 million project.

The anchor for the center is Whole Foods, a high-end supermarket chain that features organic produce and specialty foods. Securing that tenant helped sell the others on the project, including a movie theater operated by a Venezuelan company, McCorkle says.

Planning for Mercato began five years ago, during the residential and retail boom. By the time the center opens early next year, McCorkle hopes the general economy will be on the upswing again. He estimates the economy is halfway through its peak-to-peak cycle. "It will time up pretty well with the next cycle," McCorkle says.

Tale of two retail cities

Despite being separated by only about a dozen miles on U.S. 41, Naples and Bonita Springs are worlds apart when it comes to retail commercial space. According to CoStar data, the vacancy rate for non-owner occupied existing shops in Bonita Springs is double that of Naples even though it's a much smaller market. As a result, rents net of expenses are 24% lower in Bonita Springs than Naples. Meanwhile, leasing activity has been brisk in Naples, with 224,125 square feet of positive net absorption. That's nearly double the net absorption Naples experienced for all of 2007. By contrast, net absorption in Bonita Springs has been negative as more tenants vacated space than new ones moved in.

Retail space

City # buildings Total sq. ft. %vacant Avg. rent psf (net) YTD net absorption

Naples 1,149 17 million 4.9% $25.53 224,125

Bonita Springs 234 4 million 11.1% $19.46 ‑194,116

Source: CoStar

REVIEW SUMMARY

Trend. Naples retail is holding up better than other areas of the Gulf Coast.

Industry. Commercial real estate

Key. Overbuilding hasn't occurred in Naples as much as it has in other areas of the Gulf Coast, sparing landlords pain.