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Retail – Alive to Fight Another Day

Since late 2008 most retailers have been in lockdown, survival mode, some going from opening over a hundred new stores a year to less than ten.
A few, like T- Maxx, Ross, various dollar store concepts and restaurants, have continued to grow at a steady pace but much of the growth has been geographically focused with retailers assigning their limited “opento-buy’s” to areas like southern California where they have not seen opportunities like this in decades.

During the first quarter of 2010 more than a dozen retailers came out of a two year hibernation, evidently saw their shadows and decided “it is not time yet.”
They had indicated they were ready to start looking for new sites in the Houston market and asked us to identify opportunities in preparation for upcoming tours but quickly went silent and the tours never materialized.

Now, with growing appetites for store openings, retailers are turning to markets with strong longterm potential like Houston.
In fact, Houston and Texas in general are perceived as possessing some of the best potential for economic growth and retail sales in the country over the next ten years

In the past few months an increasing number of retailers have begun showing signs of being ready, willing and able to immediately start looking for sites and executing leases.
This new interest has been spurred, in part, by total retail sales numbers for November and December that are expected to top the record set in 2007.
There is also a sense of urgency based on the perception of it being a short-term “tenant’s” market while anticipating that to change soon to a landlord’s market due to a future shortage of available space.
But, getting their new store growth momentum back to previous levels may be easier said than done since most retailers have virtually shut down their store expansion capacity, greatly reducing or eliminating the in-house real estate and construction departments they have used in the past to find and acquire new locations.
While we see this as a great opportunity for retail tenant rep brokers, as retailers will need to outsource the functions previously implemented by their retail departments, we are expecting to have a very difficult time satisfying their growing appetites for quality retail space.

In Houston, we have not experienced the retail vacancy in quality retail space that many markets such as Florida, Arizona and Nevada have.
Much of the vacancy we have seen, in vacated “big boxes,” has been absorbed and there is almost no new space projected to come on to the market in the next couple of years.
Developers, like retailers, have been in a survival mode, reducing their capacity to start new projects.
Consequently, there will be a ramp-up time for them as well.
Also, in spite of the increasing interest, there are still not enough retailers looking in any one particular trade area to meet the current preleasing requirements by lenders for a sizeable project.
Prior to 2008 many retailers and therefore developers, were willing to get out ahead of residential growth and wait for the customer to come to them.
When residential growth stopped, it became obvious this was an ill-founded approach.
Today, retailers’ primary interest is in established, infill trade areas.
Once residential growth picks up again and retailer’s demands for new stores cannot be met in these established, high density trade areas, they will start to consider growth markets again; but do not look for that to happen before late 2012 to 2013.

Although another hurdle for development today is the unavailability of funds (equity and debt) at terms that justify getting a project out of the ground right now, there are improvements on the horizon in this area as well.
While retail is probably the least attractive of the different property types to lenders today, preleased (75%), well located projects being proposed by respected developers can find equity, construction and long term funds.

One interesting development in the retail industry over the past couple of years is, while sales from bricks and mortar stores for retailers have sagged, Internet sales have continued to increase significantly as a percent of overall sales.
As a result, retailers are continuing to place more value on that method of driving sales and are starting to use data from Internet sales to assist in determining where untapped customers live, targeting those markets for future store expansion.

Another bright spot for retailers over the past few years has been their outlet stores.
Many retailers, including those that previously did not want to tarnish their brand with outlet stores, now see these concepts as an important vehicle for growth.
As a result, many outlet centers such as Simon’s Premium Outlet projects have continued to thrive and generate great sales numbers.
Simon’s Houston Premium Outlets center on US 290, adjacent to the Fairfield residential community, has been so successful that it opened a phase II expansion in November.
This success has not been lost on other outlet mall developers.
There are currently three more outlet mall projects on the drawing board and vying for tenants on the south side of Houston.
Only one will win this fierce competition for tenants and be built.

In the retail income property arena, sales for the past couple of years have been few and far between.
What sales there have been, were on either end of the spectrum – distressed properties that could be bought at a large discount or “trophy” centers going for relatively low cap rates.
Many troubled assets have remained off the market because CMBS special servicers and bank REO departments have been reluctant to write down these assets, preferring to work with the current borrowers.
This situation also seems to be changing.
We have seen a significant jump in foreclosures in the past few weeks and expect that trend to escalate in the coming months.
The demand and capital for retail properties is out there, so we expect to see transactions pick up as buyers become impatient and the bid/ask gap shrinks.

Many, including myself, that have been in retail real estate for a long time feel that the past two years have been the most difficult we have ever seen.
That said, we at Page Partners have weathered the storm well.
We have increased our sales force by 36%; expanded our client base and added new business platforms including Asset Advisory Services and Land Brokerage Services.
We have entered into a joint venture with Transwestern Property Services to offer retail property management at a very high, institutional level combined with local knowledge and relationships.
But these gains have not been without a lot of pain.
The good news is we do see light at the end of the tunnel and are in a good position to serve our current and future clients as the market improves.
Alive to fight another day!

By Ed Page     –    Page Realty Partners, Ltd.

Categories: Uncategorized
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