Terranova chairman sees retail leasing bottom

Sep.September 09, 2009 01:05 PM

Condo sales in Miami are on the rise, but the retail sector continues to reel from the Wall Street meltdown that mostly froze commercial credit markets.

Retail properties in Miami-Dade County saw negative net absorption in the first quarter as mounting job losses stymied retail spending and forced merchants to vacate, according to Marcus & Millichap’s latest report. The firm expects vacancy rates to increase over the remainder of 2009 as more tenants close and others reduce planned store openings.

The restaurant and retail industries have been among the hardest hit sectors of commercial real estate. Rising job losses spark fear that worse is to come. More consumers are shunning restaurants for homemade meals and putting off unnecessary retail purchases for better days.

Retail spending in Miami-Dade County fell 6.6 percent during the 12 months ending in the first quarter, including a 3.5 percent drop in the first three months of 2009. Marcus & Millichap predicts the county will lose 43,000 jobs in 2009.

Meanwhile, developers have 600,000 square feet of retail projects slated to come online in 2009, expanding retail stock 0.8 percent. That’s on top of the nearly 2.2 million square feet that came online in 2008.

Despite gloomy statistics, Steven Bittel, chairman of Terranova Corporation, a commercial real estate advisory firm, is cautiously optimistic. Bittel, whose firm is currently involved with $1.5 billion of commercial assets, suggests the retail sector may have finally hit bottom. The Real Deal sat down with Bittel to talk about the state of the retail leasing sector, creative leasing solutions, and what’s ahead.

Developers delivered nearly 1.8 million square feet of retail space in the last 12 months. We’re coming into October 2009. What does market absorption look like today?

There’s been negative absorption. The chain stores, unless they have been super discounters like Wal-Mart, Ross, Target and Marshalls, have largely been on the sidelines for well over a year. The best growth we’ve seen has come from local and regional chains with three, four, five, and six stores that still have good banking relationships and sufficient profitability to fund expansion by cash. The result of higher vacancies has been a reversal in an almost 15-year growth in rental rates. And we’ve seen real declines in rental rates. That’s the bad news. 

The good news is that July 2009 has been our best retail leasing month in a year. And August, September, October – based on what’s in the pipeline – look like equally strong months. We feel like we hit bottom. We’re starting to recover and we think retail sales and consumer confidence measures are going to bear that out. I would say that we’re guardedly optimistic.

What are the biggest challenges you see in the retail leasing sector?

The challenges in retail leasing are directly correlated to a complete lack of debt capital to fund retailers’ expansions. People are used to financing some component of their capital structure on a new business. While we have our political leaders talking about stimulus money to loosen up capital at the banks, we have a regulatory structure telling the banks, “Don’t lend another dollar to build capital to make the banks safer.” So we have a little bit of a disconnect between what our leadership is saying versus what the regulators that operate somewhat autonomously are saying at the same time. The conventional places a small business owner looks for debt capital to open a new business are out of business right now.

What creative solutions have come from the retail leasing sector?

Everyone has dropped rental rates across the board. Every landlord has attempted to induce more tenants to play by making it more affordable. The improvement allowances have become more generous. More construction time has been made available and reduced rent in the early months of the lease has been a consideration.

At Terranova, we’ve taken some extra special efforts to make sure our tenants open strong by supporting their opening marketing efforts through activities we organize and pay for at the property. We feel like their long-term strength has so much to do with how they do in the early few months. So we want to make sure they start well.

Everyone is looking at kinds of tenants that we might not have been as eager to have in retail locations in the past, particularly medical users. It’s a lot less expensive for a hospital system to build a 15,000-foot outpatient facility in a vacant big box than it is to buy the land and build a new facility.

A year from now, do you think we’re out of the woods?

There’s no question we’re going to see store sales in September, October, November, and December [turn] positive because we’re going to be comparing to incredibly bad months a year ago. I don’t think those sales will return to the levels they were in 2006 and 2007. The process of rebuilding is a lot harder. It takes a lot longer than the shutdown took. The real recovery is dependent upon jobs. I suspect we’re not going to start seeing positive job growth until January. 

We’re better off a year from now. I don’t think we have recovered. I think this recovery is going to be probably at least two years out and maybe as long as four until we start absorbing a lot of the excess inventory and until conventional lending is restored in the debt marketplace.

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