New Day For New England
Despite slow population growth, retail is still a hot commodity in New England.
Moderated by Jerrold France, Randall Shearin and Stephanie Mayhew

(left to right) Steve Karp, Robert Sheehan, Don Mace, Scott McIsaac and Mike Jacobs.

Shopping Center Business and Northeast Real Estate Business recently held their inaugural New England Retail Roundtable at the Boston offices of Goulston & Storrs. Developers, brokers and lenders from the greater Boston area came together to discuss the current retail activity in Boston and throughout New England. Attendees were: Steve Karp of New England Development, Jeremy Sclar of S.R. Weiner, John Roche of the Flatley Company, Doug Husid of Goulston & Storrs, Allan Rottenberg of Goulston & Storrs, Edward Jordan of Marcus & Millichap, Mike Jacobs of Glickman Real Estate, Don Mace of Finard & Co., Robert Sheehan of Finard & Co., Mark Mancuso of CBL & Associates, Ted Chryssicas of Meredith & Grew, Rick Talkov of Goulston & Storrs, and James Young of General Growth Properties.

SCB: We always hear that the barrier to entry for retail is tough in New England. Is there any truth to that?

Jeremy Sclar

Sclar: Today, the barrier [to entry] is as big as it has ever been. There are a few unique projects that get people excited. The reality is that there are fewer sites available, and the sites that are available have lots of issues. We have been doing this for 20 years in New England and it has never been more difficult to get a permit. Every town that you go to wants a high-end lifestyle center. You can be looking in a trade area where the market doesn’t warrant that kind of mousetrap and that’s what the expectation is. Tolerance for traffic is lower than it has ever been. There are some places where these New Urbanism-type projects get a community excited. Over the whole geography of New England, it has gotten tougher.

Chryssicas: Are you finding that further out from the city?

Sclar: Yes. In Mansfield, where we are under construction today, we started permitting that project years ago. We are building a shopping center with L.L. Bean, Ann Taylor Loft, Borders Books and lots of restaurants. This is a community that 7 years ago permitted a shopping center without much controversy. Ten years ago, we would have had the permit within 6 months. Now, it takes more than 4 years. This is a trend everywhere we go. The sexy, great mixed-use projects get people excited, but you still have to wrestle with the traffic ramifications.

Ed Jordan

Jordan: In leasing up the retail component of mixed-use properties, are retailers looking to the residential for demographics or are they looking at the broader demographics of the area?

Sclar: My opinion is that the residential component is the gravy. In a trade area of 300,000 people, you are looking at the people, and the gravy is going to be who lives right on top of you. If you don’t have a trade area, it doesn’t matter how many houses you build on top; it is not going to drive sales.

Karp: The biggest problem is that it is really hard to build these projects with deck parking. You can’t build underground parking in locations where you can’t charge. The costs of construction have gone up so fast the past few years that if it isn’t paid parking and you put too much density in the site, the numbers are beginning to tilt a little bit. Rents are not going up as fast as costs are.

SCB: As developers, have you seen the costs of construction materials increase? Is it preventing you from moving faster? There is competition developing nations that are driving our costs up as well.

Young: It has turned. A few years ago, it was going crazy. The steel price and the price of concrete, concrete block and sheetrock. Now, China is shipping materials back to us. A lot of the materials that we are using are coming from China. I’m told the quality is American standard. Granite, for example. Even with that heavy weight, we’re seeing it shipped from China to Brazil and then to the U.S. — and it is less expensive than domestic granite.

Karp: Don’t get the impression that construction costs are less, because they are not. We can’t get a handle on budgets [because construction costs] move so fast now. Prices are still going up.

Jacobs: In Central Massachusetts, we were attempting to do a single-tenant big box with some ancillary retail. We were using prices of 3 years ago. We needed to establish the price for a two-level parking deck. The prices were almost double. It set the project sideways.

Young: I didn’t mean to imply that prices were low. The curve has just slowed down.

(left to right) Rick Talkov, Ted Chryssicas and Mark Mancuso.

Mancuso: Construction costs have put a lot of pressure on margins. When you build a project, the tenant can only project so much sales volume, which translates into a rent. We’ve seen 10 percent to 20 percent increases in hard construction costs, so something has to give. In our case, it has been the rate of return on our investment. Interest rates have been reasonably low, but recently they have gone up. Our spreads are really thin.

SCB: General Growth is redeveloping Natick Mall. Can you tell us about that project?

Young: I am from the construction side of our business. We are currently doing an expansion of Natick Mall. We’re [just finishing] the interior upgrade and remodeling. We bought the old Wonder Bread factory and knocked that down. We excavated 500,000 cubic yards and built structured parking underneath and added on to the mall. It will be about 75 percent larger than the current mall. We are adding Neiman-Marcus and Nordstrom. This will be Nordstrom’s first location in Massachusetts. We are also developing a 221-unit condominium project on top of the mall, with a separate parking deck.

Mancuso: How has the residential aspect of Natick Mall been accepted? It is a very different concept – putting condos on top of a mall.

Young: The construction is just getting above six or seven stories and suddenly you can see it from the street. There is more interest of course. We have received over 200 deposits from interested buyers. The condos won’t be ready until spring 2008. We didn’t want to have 200 people moving into the mall during the Christmas season.

Chryssicas: Has General Growth done this elsewhere?

Young: This is the first for anyone, so we are being watched a little bit. There are plans to do this all over the country.

Chryssicas: Steve [Karp], has the downturn in the housing market in Boston impacted your development plans in Westwood?

Karp: No, but I think we will do more rental than for-sale units. There is a pent-up demand for that market out there. Two years ago we would have been developing more condos than rental. We are doing a mixed-use project in Chestnut Hill, but there are a few things going on in that market that make it different. The Filene’s at Chestnut Hill Mall will become a full-size Bloomingdale’s, so they will have Bloomingdale’s at both ends of the mall. The old Bloomingdale’s will become a Macy’s. We are doing a project across the street with Whole Foods and a few hundred thousand square feet of lifestyle tenants and restaurants. We are doing housing, but we will have condos there because we think the Chestnut Hill market is deep enough that there is a demand. We will build two condo towers there that are more a type you would see downtown than in a suburban location.

SCB: This is such a great urban market. How is the on-street retail in Boston? Is there still a lot of opportunity for retailers to enter the market?

Mace: The demand is extremely strong from retailers. Boylston Street and Harvard Square are lined with tenants who are vying for the best spots in those areas. We are starting to see new tenants with some different concepts coming into the market. There are some existing retailers who are testing new concepts. Best Buy continues to talk about a new concept. There are some alternative pharmacies, like Elephant pharmacy, who are trying to enter. Citibank is trying to penetrate New England. They are taking some of the best retail spots.

Chryssicas: There are some London-based retailers coming over as well. Charles Tyrwhitt is trying to get over to follow Thomas Pink, who came over a few years ago. Zara has not found a home in Boston, even though they have been looking for a long time. There is not enough product here. Even on Newbury Street – half the space is walk-ups and walk-downs. These national and international retailers don’t find that acceptable. One huge opportunity, if it can ever be orchestrated, would be Rose Kennedy Boulevard. You are anchored by North Station and South Station. Once the [road] construction is completed, you will see this become a huge shopping boulevard, especially with the addition of some new hotels here.

SCB: Has Boston’s Big Dig been a plus or a minus for retail? [Editor’s Note: Boston’s Central Artery/Tunnel Project is known as the “Big Dig.” While replacing Boston’s six-lane elevated highway with an eight-to-ten-lane underground expressway, the project also created 27 acres of green space where the former highway was located. Construction is still underway on some development parcels in the area.]

Sheehan: There has been no influence at all. It hasn’t spurred growth in retail or dissuaded anyone from coming.

Chryssicas: With the sale of Marketplace Center for $1,000 per square foot, they are envisioning something grand along Rose Kennedy Boulevard. There hasn’t been any impact as of yet, but everyone is planning for the future where they can. There aren’t many opportunities. I do think that people are planning for the future and that is what is driving up the values.

SCB: Boston is a great restaurant town. Are there new restaurants coming to town, or are most of them local?

Chryssicas: The nice thing about Boston is that there is a healthy mix of chef-driven restaurants, local restaurants and national players. In the North End and the Back Bay, there are great chef-driven and local restaurants. And for the business traveler we also have McCormick & Schmick’s, P.F. Chang’s, Smith & Wollensky and Maggiano’s. We have a nice mix. There is a lot of pent-up demand hovering around the Boston market right now.

Sclar: We have never seen the amount of restaurant demand that there is today.

Chryssicas: Warren’s is signing up for a second restaurant in Boston. Kona Grill is looking and J. Alexander’s is looking. Houston’s is hungry for another spot because they are doing so well in Faneuil Hall.

SCB: The banks and drug stores are competition for more traditional retailers when it comes to finding space. How is that competition faring in the Boston market?

Sclar: The drugstore business has been a constant for a number of years in the market. Both Walgreens and CVS have been very aggressive. They have penetrated a lot of the better spots. The bank competition isn’t what it is in metro New York. There are a few players there that are aggressively paying numbers that we haven’t seen in Boston. I expect that to happen here based on the arrival of Citibank and a few other new players who are looking around.

SCB: How is Boston as a market for investors?

Mike Jacobs, Ed Jordan and Doug Husid.

Jordan: Construction prices require higher rents to justify developments. That trickles down to the price per square foot that we are selling existing product for. It used to be at $200 per square foot you could start building. Now we are seeing area retail product trading north of $200 per square foot and commanding good attention in the investment market. Demand is constant here, whether it be pharmacies or restaurants. The problem in Boston is on the supply side. There is only about 1 percent growth in retail space annually. The obstacles to development here are high. It creates a healthy environment here for the transactional business. There was a lot of doom and gloom coming into 2006 with regard to demand for retail because of the home equity activity starting to dry up. There was doom and gloom regarding where cap rates might go and demand for investment properties. Last year we sold $5.5 billion in retail products, about 1,900 retail transactions. This year, we are tracking over those numbers. The demand is still there for investment-quality, credit-tenanted product. Cap rates have plateaued, but we don’t see them moving up at all. On B and C class assets, cap rates are probably decompressing a little bit, but it is more driven by the fact that investors and lenders are looking at cash flow a lot more closely for the first time. The market is still there. Last year we had 10 to 12 potential buyers for every asset and this year it is down to five or six. We are still getting very competitive prices for these properties. Retail is a product type of preference for most investors. Many people coming out of multifamily and looking to exchange are doing so into strip centers. Boston is a very healthy investment market. We are opening an office here in January.

SCB: Do you have investors from the market itself or are they from outside the market?

Jordan: We import capital. Out-of-state investors are buying on the numbers. They don’t have some of the local prejudices regarding particular submarkets.

SCB: Who are the buyers? Are they private or public?

Jordan: Most of what we do is private equity. We are positioned to access that private equity. We do institutional business as well. The sellers are a mixed bag. People sell for different reasons. Some of that business falls in our lap, some falls with our competitors. We are very bullish on the New England market right now. We face the same problem that brokers on the leasing side do – there is not enough supply.

Roche: In Central Massachusetts, there is much less inventory than there is here in metro Boston. Most of the landowners are holding their properties. They have no interest in selling. We have seen only two or three shopping center sales this year. That covers the entire grid of Worcester County.

Mace: I see a lot of players coming into the market. Cedar Shopping Centers has acquired a number of shopping centers over the last year. Equity One is still looking at a lot of property. Most of the product that we are servicing today is grocery-anchored and that market is very strong.

SCB: Scott [McIsaac], as a lender, how does John Hancock look at this market?

McIsaac: Hancock has always been a very strong retail lender. We have traditionally concentrated on the neighborhood and community center end of the pool. There is a lot of activity with the power centers. We have done some. We are a bit concerned about exposure to individual credits. The market is very strong and the supply is very constrained. There is an enormous amount of capital out there. This year, we reeled in a little bit. We were so concentrated in retail in our portfolio that we wanted to fill out with some more office, residential and industrial. We have done that and we are back looking for more retail. Just to give you an example of how strong it is, I rolled over an existing loan that we had on a strip center in southern New Hampshire last year. We were valuing the property at $12 million. Our loan was $6 million. The appraisal came in at $15.5 million in November 2005. I just got a request from a new buyer to assume the loan and the new buyer is paying $17.5 million. That is a 6 cap on a tired, 30-year-old center in Southern New Hampshire. It is wild out there. Our traditional underwriting standards for retail have been to take some reserves for leasing and capital replacements; to not underwrite less vacancy than is prevailing the market area. We’re getting beaten out on loan quotes by lenders who aren’t imposing that discipline on themselves. We are getting beaten out by lenders with lower debt coverage ratios than we have traditionally required. There is too much money chasing too few good deals. It has led to some erosion of underwriting standards that can’t be sustained for the future. Landlords used to use the financing source as the bad guy in order to have some negotiating clout with the chief tenants. The landlords have lost some clout and the tenants have gained some clout in negotiating leases. We have turned down some deals because we didn’t like some of the lease provisions. At some point, the capital cycle will turn and that balance of power will shift again.

SCB: When you have a lot of money out there chasing a little product, do you find that people are not making as prudent an investment?

McIsaac: It depends on whether you are the one who won the deal or the one who didn’t.

Jordan: Maintaining the quality of the underwriting is the challenge. Just as you are competing with other lenders who might be applying other underwriting criteria, we also compete for listings with other brokers who apply other criteria. We try to maintain standards. Going into the next 12 to 18 months, there will probably be more emphasis on selling the business plan versus selling the asset. We are finding that we need to show the road map for the new owner in terms of meeting their target yield than we did over the last 12 months when they simply lined up to buy. There is a subtle shift, but as long as properties are priced to deliver a target cash-on-cash return, product is still selling.

Jeremy Sclar and Alan Rottenberg.

Rottenberg: Regarding the Big Dig and Rose Kennedy Boulevard, I just don’t see the theme yet to what the Big Dig is going to do and what they want on the greenway. I think it is a real opportunity. It is a once-in-a-century opportunity to create something between South Boston and the Big Dig. The greenway issue needs to come into focus more.

McIsaac: There hasn’t been a lot of planning vision applied to that. You see nice renderings of landscaping on [the greenway] but not too much in terms of what the program and concept is behind it.

Roche: Most of our development surrounds Boston. We have a lot of projects going on in New Hampshire. We have one in Portsmouth where we tore an office building down and created a big box with some other smaller retail. We pushed into Rochester, [New Hampshire], which is a voided market between Portsmouth and Conway. We’ve got another mixed-use project

Living At The Mall The redevelopment of the Natick Mall in Natick, Massachusetts, will consist of the renovation of the existing 1.1 million-square-foot mall and a 550,000-square-foot expansion wing. The newly redeveloped Natick Mall in Natick, Massachusetts, is set to change the face of retail in New England. “Already a shopping destination in Massachusetts, the redevelopment and additions to the existing Natick Mall will provide a luxury shopping experience for an underserved market,” says Frank Lazorchak, general manager of the Natick Mall. The mall, which will hold its grand opening in September 2007, will consist of the renovation of the existing 1.1 million-square-foot mall and a 550,000-square-foot expansion wing. Renovation of the existing mall was completed this month and features updated flooring, restrooms, ceilings, balustrades and a completely renovated food court. The expansion wing will house the state’s first Nordstrom, which is slated to open in September 2007, and the state’s first suburban Neiman-Marcus, which is also set to open in September 2007. The existing mall houses Lord & Taylor, Macy’s and Sears, plus a JC Penney, which will open up in March 2007. The development will also include 100 luxury retailers and fine restaurants. In addition to the retail component, 215 luxury condominiums will attach directly to the center. The new units are scheduled to open in February 2008. The property also contains a set-aside pad for a 4-star, full-service hotel. The retail and residential portions were developed by General Growth Properties and designed by the architectural firm Beyer, Blinder, Belle. Other amenities include valet parking, a car spa and premium paid parking. Located just a mile from I-90 in the western suburbs of Boston, the mall is located in the second most affluent suburban trade area in the nation. “By 2007, the expenditure potential for shoppers’ goods and merchandise is projected to reach $3.6 billion — an increase of 37.3 percent from 2001. Incredibly, the fashion specialty classification will swell to $1.6 billion — a gain of 55.9 percent over 2001. Natick attracts roughly 17 million customers annually and research shows that the center has dominant penetration throughout the trade area,” says Lazorchak. As the area’s population continues to grow and with an average household income of more than $100,000 per year, the Natick Mall could not be in a better position. “With the expansion, the trade area is projected to double in size to 1.3 million residents. Presently, the center’s trade area is home to approximately 660,000 people and 250,000 households. In addition, there are more than 1.3 million people within a 15-mile radius. The trade area is affluent with an average household income of $115,863,” says Lazorchak. Lazorchak also notes that the surrounding office space is another factor that affects the trade area. Within a 3-mile radius, daytime employment is 73,014 and it is 100,891 within a 5-mile radius. Natick Mall developers are targeting female shoppers ranging from 25 to 54 years of age with an average household income of $115,000 per year. Once the expansion is complete, developers will be targeting shoppers with a household income of $150,000 per year. According to Lazorchak, area customers are anxiously awaiting the mall’s transformation as are Natick town government officials. The Natick Mall is anticipated to provide tax payer revenues for future civic projects throughout Natick. — Stephanie Mayhew

Transit-Oriented Mixed-Use            Westwood Station’s 4.5 million-square-foot mixed-use development brings 1.2 million square feet of retail space to the heart of greater Boston. Situated on a 135-acre site, Westwood Station’s 4.5 million-square-foot mixed-use development brings 1.2 million square feet of retail space to the heart of greater Boston. Developed by New England Development in partnership with Cabot, Cabot & Forbes and Commonfund, the lifestyle component is set within a pedestrian-friendly environment that combines retail and dining with the development’s office and residential components. In addition to the 1.2 million square feet of retail Westwood Station will include 1,000 residences, 1.75 million square feet of office space and three hotels. Slated for completion in 2008, the development is within easy access to Route 128 and 1—95 and to the Amtrak/MBTA Commuter Rail Station at Route 128.

Pier 4 New England Development is currently developing Pier 4, a mixed-use project set on 9.5 acres (including about 4 acres of water) on the South Boston Waterfront. New England Development is currently developing Pier 4, a mixed-use project set on 9.5 acres (including about 4 acres of water) on the South Boston Waterfront. The new development will include approximately 1 million square feet of hotel, residential, office, retail and civic uses. The project will replace the aging and deteriorating Fan Pier with three new buildings and an underground 1,200-space parking garage. The project will include approximately 200 to 215 residential units, a 200 to 250-room hotel, approximately 385,000 square feet of office space, approximately 35,000 square feet of street level retail, as well as other associated support areas. A new 20,000-square-foot civic space will be located on the second floor lobby of the office building. The project will promote pedestrian activity and enhance the revitalization of the South Boston Waterfront.   — Stephanie Mayhew

Legacy Place Legacy Place, a 735,000-square-foot lifestyle center in Dedham, Massachusetts, will serve a bustling residential area that is home to several residential developments, but very little retail. Legacy Place is 735,000-square-foot lifestyle center in Dedham, Massachusetts. The project is being developed by a joint venture between W/S Development and National Amusements. The property is situated at the intersection of I-95 and Route 1, one of the busiest commercial routes in all of New England. Just 15 minutes from downtown Boston, the new center will serve a bustling residential area that is home to several residential developments, but very little retail. There are approximately 300,000 people with in the primary trade area with household incomes of roughly $100,000 per year. The area also serves 171,000 daytime employees. David Fleming, the corporate marketing director for W/S Development, says, “Legacy Place is a nice combination because it has great roadway access, close proximity to a multitude of housing and it is near the Boston Commuter rail station.” Anchor tenants include a 60,000-square-foot Whole Foods and a 16-screen, 91,000-square-foot Cinema de LUX. Other tenants include L.L. Bean, Anthropologie, Urban Outfitters, Legal Sea Foods, P.F. Chang’s and Ruth’s Chris Steakhouse. Designed by Prellwitz/Chilinski Associates, the center combines New England architecture with modern design elements. “In New England there are not too many lifestyle centers, so the combination of the tenants and the architecture is really what makes Legacy Place truly unique to the area.” The development is slated to break ground in January 2007 and is scheduled for completion spring 2008. The center also contains an approximately 100,000-square-foot office component, which will house the headquarters of National Amusements.   — Stephanie Mayhew