Retail brokers stay optimistic (naturally) about the troubled market

Top firms are boosting head counts and citing opportunity on the horizon, but the growth will largely focus on distressed properties
By C.J. Hughes | May 17, 2017 01:00PM

From left: Naveen Jaggi of JLL, Bill Rose of Marcus & Millichap and Mark Hunter of CBRE

Retail brokers are like Teflon warriors these days, with many of them appearing unfazed by the hit the market has taken and even optimistic about the new opportunities presented by the changes afoot.

Market equilibrium may be around the corner, they point out, as conditions force landlords to slash rents to keep up occupancy levels. And new retail space is arriving at a much slower pace, which could also help stabilize markets, brokers add.

Plus, though consumers may be doing more mouse-clicking for their household goods, they’re often trudging to brick-and-mortar stores to return items, which results in bodies through the door.

With this optimism in mind, several retail firms are boosting head counts, even if those new agents are often focused on distressed properties.

“Retail is not by any means dead; it’s just changing to better deal with the tumult in the market,” said Peter Braus, the managing principal of Lee & Associates’ New York office, who recently poached two seasoned agents from rival firms, bringing his payroll to 30.

Below, The Real Deal looks at the comings and goings in all sectors of retail real estate — investment sales, leasing and consulting — in five top retail markets.

New York

In recent years, the Big Apple — which in many ways is a retail bellwether for the country — has enjoyed a banner economy, as stores popped up in even once-unimaginable, super-industrial areas.

And retail brokers smelled opportunity. Eastern Consolidated, for instance, a 30-year-old New York-based firm, added its first retail division in 2014.

Likewise, JLL, which has been ramping up its retail division nationally since 2014 and is ranked fifth on TRD’s list of top brokerages by retail sales, also beefed up its New York presence. Robert Gibson jumped over from Cushman & Wakefield (No. 6) that year; today he is the division’s vice chairman. And joining him last summer were Robert Kempner, from ABS Partners Real Estate, and Taylor Wos, from Cushman.

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By some measures, these retail brokers and others would seem to have a lot to do. Perhaps unexpectedly, New York boasts a robust mall sector, in a country where many malls are dying. The Staten Island Mall, for instance, is adding 427,000 square feet to its existing 1.2 million-square-foot facility, which was built in the 1970s and is owned by GGP.

On the same island, work is underway on Empire Outlets, a 100-store complex with a 150-room hotel, which is supposed to open this fall, and several restaurants.

But there are glaring weak spots, like the rash of retail vacancies on prime strips like Fifth Avenue in Midtown, Madison Avenue on the Upper East Side and Bleecker Street in Greenwich Village.

Vacancy rates are a whopping 20 percent in places, brokers say, up from the traditional 5 percent.

“When the Polo store [in Midtown] announced it was closing, it sent a shudder through the market,” said Braus of Lee & Associates. “The state of retail right now is very much in flux. If companies are trying to cut costs, it’s natural to look at locations that are the most expensive.”

Last spring, Lee & Associates lost Harris Bulow to Eastern Consolidated; his three-year-old team now has 22 agents. But Lee & Associates also just added brokers: Mark Kapnick, from SRS Real Estate Partners, who last fall inked a deal to bring Volvo to Sky, a Midtown luxury rental tower, and Greg Tannor, from Cushman, a specialist in the Meatpacking District.

Last November, Cushman also lost C. Bradley Mendelson and David Green, who defected to Colliers International (No. 9). But Cushman did pick up Sean Moran from CBRE Group, No. 1 on TRD’s ranking; Moran oversaw the expansion of Junior’s restaurant to Times Square.

Chicago

The retail slowdown has definitely hit in Chicagoland, which includes the city and the sprawling suburbs around it, according to Marcus & Millichap (No. 2).

Last year saw 3.2 million new square feet of stores in development, but only 1.3 million — or less than half — is expected to be built, the firm said. The area’s average asking retail rent this year is about $17 a square foot, which is around where it’s been for several years. As a result, firms don’t seem to be committing much fresh firepower to the shores of Lake Michigan.

Marcus & Millichap, for instance, has 24 agents there in three offices, which is mostly unchanged from recent years, though the suburban Oak Brook office has grown slightly, said Bill Rose, the national director of the firm’s retail group. (Nationally, the firm has 450 retail agents, up from about 250 in 2010, he added.)

There are deals to be had, though. In March, Sean Sharko, a 13-year agent with the firm, handled the sale of 10 East Golf Road in Des Plaines, near O’Hare International Airport, a newly developed 73,000-square-foot store that is home to Mariano’s, a local gourmet grocery chain.

Abbott Land & Investment, a local developer, and WBS Equities sold the site to Realty Income, a San Diego-based real estate investment trust, for $34.5 million. And the deal, which was completed about 10 days after the store opened, is the latest in a series of high-priced transactions in the area for Mariano’s-anchored retail properties.

If national firms are mostly steering clear, it may be because some local powerhouses are so dominant, like Mid-America Real Estate Group. Among its recent highlights was the $147 million sale of a 200,000-square-foot retail condo at 1 South State Street to Acadia Realty Trust last summer. The seller of the building, which has Target as a tenant, was Smithfield Properties. And the brokers who handled it for Mid-America, Joseph Girardi and Stanley Nitzberg, are veterans of the firm.

Holliday Fenoglio Fowler, or HFF, which has 24 offices nationally and takes the fourth spot on TRD’s ranking, has been on a hiring spree as of late, though its hires focus on areas like industrial sales and debt placement. Still, the 27-agent Chicago firm does have some sizable retail deals under its belt: It handled the $133 million sale in 2016 of the River East Center, a full-block property at 322 East Illinois Street with tenants like Walgreens, AMC Theaters and LA Fitness. The buyers were Wheelock Street Capital and Madison Capital.

Meanwhile, major national player CBRE has swelled its ranks to augment its retail business. In winter 2016, Mark Hunter, a mall specialist who once worked for GGP and who has managed more than 130 shopping centers in his career, joined the Chicago office. Since 2015, CBRE has handled the sales of 19 malls across the country, from 489,000 square feet to 1.5 million square feet, a spokesperson said.

Los Angeles

As waves of development wash over Los Angeles, including in trendy central and Eastside areas, retailers — and their brokers — are angling to greet them. In 2015, JLL snapped up the Wilson Group, a local retail-focused brokerage with 16 employees, and 9 million square feet in 75 shopping centers under management.

“We don’t want to be everything to everyone everywhere, but instead focus on some key markets,” Naveen Jaggi, the president of the firm’s retail brokerage, said of its expansion in L.A.

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Jaggi was hired in 2014 from CBRE, where he had repped tenants for more than a decade.  It was at a time when JLL was ballooning: JLL’s 64 retail brokers in 2014 are 154 today, and business has more than tripled in the same time frame, from about $25 million to $80 million, Jaggi said.

He said that competition from online retailers has forced JLL to offer a broader range of services. It now will help vendors design their shops, for instance, right down to picking out carpets, which are among the touches that are expected to help get customers to spend more time and money in physical stores.

Jaggi said Los Angeles seems somewhat unaffected when it comes to the rollicking retail market. “It’s a thriving and diverse market,” he said, going so far as to call it “recession-proof.”

However, the Bloc, a 400,000-square-foot retail development in Downtown L.A. that had served as a beacon of hope for the industry, has had previously announced tenants jump ship, a changing cast of retail leasing brokers and, to date, three pushed-back openings.

And the tight vacancy levels in L.A. might be explained by crimped supply more than pent-up demand. A single store will likely account for most of the new retail space added to the market this year: an Ikea in Burbank, which with 456,000 square feet and 1,700 parking spaces is the largest in the U.S. It opened in February.

Overall, vacancy rates have dropped in the past few years while average asking rents have soared to about $30 a square foot annually, according to Marcus & Millichap. Particular hot spots have been the once-shunned Downtown and communities in the San Fernando Valley. Any new stores also tend to not be speculative but instead preleased, reducing excess supply, the firm said.

Unlike many U.S. cities, L.A. also has a robust mom-and-pop retail market, with room to grow, JLL says.

JLL has company. HFF handled one of the largest recent retail property transactions when Kilroy Realty, a local real estate investment trust, purchased a four-building office and retail complex at 8560 West Sunset Boulevard in Hollywood for $210 million. Tenants include Equinox, SoulCycle and Oliver Peoples.

Broadreach Capital Partners, the seller, was represented by HFF, with many of the agents involved, like Bryan Ley, Andrew Harper and Ryan Gallagher, having joined the office in the last several years. Similarly, Michael Leggett became co-head of the West Coast for HFF in 2016. Earlier in his career, Leggett was with Cornish & Carey as well as CBRE.

Miami

“The old adage is true. As goes New York, so goes the world,” said Rose of Marcus & Millichap, referring to the many cities now trying to create walkable downtowns like Manhattan has.

That seems to be the case in Miami, whose downtown was once forlorn after dark but now teems with development projects to serve a population that doubled between 2000 and 2016, according to city officials.

Under construction is Miami Worldcenter, for instance, a 27-acre mixed-use project with condos, apartments and hotels, along with pedestrian-only streets lined with stores, that broke ground last year.

A previous plan that called for an enclosed mall, and more floor area for stores than in the current plan, was scrapped last year. Taubman Centers, a Michigan-based mall operator, is handling leasing, along with the Forbes Company, another mall developer.

Miamians also have plenty of other new locations in which to shop. CityPlace Doral is a self-contained mixed-use mini-city with 40 stores and 235,000 square feet of retail. The $800 million project, from the Related Group, opened in March. Mall expert Warren Dauber of Related, who previously worked as a broker with Newmark Grubb Knight Frank and Robert K. Futterman and Associates, handled the lease-up. For its part, Newmark  (No. 7 on TRD‘s ranking) currently has 132 retail agents across the country, a spokesman said.

And the Design District, a once-gritty area in Miami, is going through a multimillion-square-foot revamp that will ultimately include 120 stores and at least 15 eateries, according to the area’s primary developer, Dacra.

Overall, about 2 million square feet of retail will be added to the greater Miami area this year, according to Marcus & Millichap, the most since 2008 (in 2016, 890,000 square feet was delivered). But the added supply should push the vacancy rate higher, to 4.1 percent, the firm says. It ticked up in 2016 as well.

That said, those Miami malls have been planned for years, and it’s unclear if developers would embrace them wholeheartedly today. According to JLL, malls, nationally speaking, have about a 5 percent vacancy rate, as compared with 3 percent for stand-alone businesses like pharmacies or grocery stores. Shopping centers — a grocery store with some smaller retailers, say — are doing even worse, with an 8 percent vacancy rate, according to JLL.

In terms of active retail brokerages in the area, HFF, led by longtime agents Daniel Finkle and Luis Castillo, chalked up one of the biggest recent deals with the sale of the Palms at Town & Country in Kendall, an eight-year-old shopping center with a Marshalls. Weingarten Realty bought it for $285 million in August in one of the largest retail deals of the year.

Dallas

Despite low oil prices, the Metroplex —  that is, the greater Dallas-Fort Worth area — appears to be booming. In 2017, 100,000 new jobs are expected to be created, according to Marcus & Millichap, a trend driven by the many corporate headquarters in the area, like Toyota, JCPenney and AT&T.

At the same time, 60,000 new households are expected, driving the demand for grocery and furniture stores, among others. “Housing sales is a very good indicator of how healthy the market is,” said JLL’s Jaggi.

Retail-wise, 2017 is expected to see the construction of a hefty 3.1 million square feet of stores, most of them stand-alone —  about the same as in 2016, according to the data. Average asking retail rents are about $16 a square foot annually in the area.

Tanger Outlets is expected to open a 350,000-square-foot, 80-store complex, its 45th, this year. Most of the stores were leased in advance, according to news reports.

“We don’t overbuild in retail,” said Rose of Marcus & Millichap.

One firm that is rapidly expanding in Dallas is Avison Young, which only opened an office there in 2011, though its expansion was helped by the 2013 acquisition of Dillon Corporate Services, a division of Cresa, the tenant-focused firm.

Avison’s Dallas office employs 43 people and manages 3.5 million square feet, according to the Toronto-based parent company.

Greg Langston, the firm’s managing director, was not available for comment. But in January, he told D Magazine, a local publication, that he expects brokerages to merge and the sector to contract.

“There likely will be an interest-rate increase, which will make it even more expensive to construct buildings. The cost of tenant finish-out has already gone bonkers,” he told the publication. “So, will that put a lid on new construction? If you’re going spec, you better have money behind you.”

In the meantime, many eyes are on landscape-altering infill efforts like the $3 billion Dallas Midtown mixed-use megaproject, which is now underway.

Dallas Midtown is an attempt to create a dense, New York-style enclave where none existed before,  razing the Valley View Center Mall in the process. The development is expected to offer a variety of stores, from big boxes to mom-and-pops, brokers say.

In Dallas and elsewhere, the threat from online sellers is not going away. But brokers say it might not be as bad as it first seems.

Shippers need distribution centers in local markets, an important driver of activity. What’s more, when people buy shoes online from, say, Nordstrom, and find them to be too tight, they will often return them to a physical store. Once the customer is in the door, he or she might be tempted to buy a few more items.

Simultaneously, brokers point out, the market-shattering powerhouse Amazon is starting to open its own brick-and-mortar stores, realizing, perhaps, that those buildings can function as high-profile billboards.

“You need bricks and mortar,” said Braus of Lee and Associates. “But people are going to continue to go to stores and take pictures of items with their phones and then price them out…You can accept that trend and master it, or get run over by it.”

Harunobu Coryne provided research for this article