Predicting Trends
A panel of CB Richard Ellis’ top minds in retail helps Shopping Center Business predict some trends — and outcomes — in 2008.
Randall Shearin

Shopping Center Business recently met with the top minds in retail at CB Richard Ellis to get a feel for the market in 2008.

A few of CB Richard Ellis’ top minds in retail recently sat down with Shopping Center Business to discuss some leading trends for the industry in 2008. We specifically asked the executives about the investment climate, tenant activity, market activity, mixed-use and retail trends. Since acquiring Trammell Crow Company in December 2006, CB Richard Ellis (CBRE) has continued to grow its lines of business, and as the world’s largest commercial real estate services firm, CBRE continues to play a major role in the industry.

At CBRE’s Midtown Manhattan office recently, Shopping Center Business met with Anthony Buono, head of retail for the Americas for CBRE; Todd Caruso, head of CBRE’s retail property and development business for the Eastern U.S.; Scott Kaplan, head of retail property and development for the West; Naveen Jaggi, who heads the tenant practice for the Eastern U.S.; and Annette Healy, who handles national and international retail accounts from the company’s New York Tri-State region.

Investment Activity

Naveen Jaggi and Annette Healy.

Investment activity in retail has been affected by the recent slowdown in CMBS lending. The result is that there are opportunities in the market for buyers who have alternative sources of capital, such as institutional owners. In 2008, Caruso thinks there may be a decline in private ownership acquiring centers. The REITs, he says, will continue to be very active in their acquisitions. Insurance companies and pension fund advisors are other institutions who are looking to acquire in 2008, says Caruso. CBRE is continuing to see strength in values of all retail properties in major markets.

“The only significant fall-off we see from the buyer pool is the pure private player,” says Caruso. “The amount of leverage that they require to purchase retail properties simply isn’t available from the lenders anymore.”

Where are the institutions looking to buy? For those seeking safe havens, the major markets still have significant pull.

Todd Caruso.

“The institutional buyers have vacancy concerns about secondary and tertiary markets,” says Caruso. “If a vacancy develops, the time it takes to fill in a secondary market can be longer than in a major market.”

Another change the CBRE executives see is foreign capital flowing into the U.S. German funds are active, as are those from other European countries. Australia and Israel, too, have become a major source of capital to acquire U.S. retail properties.

“Foreign capital is terrific for our industry,” says Buono. “Retail real estate is widely accepted as a necessary component of international investors portfolios, with core urban markets being the most desired target for acquisition in the Americas.

“We’re still continuing to see strength in asset values, without major shifts in terms of some upward pressure on cap rates in core markets,” adds Buono. “What has changed is there has been a reversion to normal and ordinary cap rates for retail properties in secondary and tertiary markets.”

Market Activity

Because of the subprime lending meltdown in residential, many investors are switching their activities to primary markets, which are less likely to be impacted by harsh economic conditions. While investment activity remains strong in some secondary and tertiary markets with stable economies, like university towns and state capitals, primary markets have become the target of many investors and retailers. New York, San Francisco, Los Angeles, Washington, D.C, Seattle and Chicago top the markets where CBRE is seeing tenants seeking space.

“In these more mature markets, where you can’t create new supply, prices go up,” says Healy. “You can’t add to Madison Avenue; it is what it is.”

Naveen Jaggi.

The Sunbelt markets will feel some pain in 2008, says Buono, because of the overbuilding that has occurred and the overbuilding of homes that occurred in some markets, like Phoenix. Since retail correlates to the number of new rooftops, if rooftops slow, retail development may have a slower development and lease-up timeline. CBRE executives are quick to point out that while development and acquisition activity may slow in the Sunbelt, retail rents are still holding their own.

“Even in overbuilt markets, we are seeing rents stable or even rising in almost every market, from Atlanta through Texas,” says Jaggi. “There continues to be a premium on quality projects.”

CBRE is also seeing increased interest from investors and retailers in markets like New Jersey, where there is little availability of retail space, low retail square footage per capita and tough barriers to entry for new developments. New Jersey also has one of the highest incomes per capita in the country. This makes any available space premium space for retailers.

Another area where CBRE is seeing growing retail activity is the Gulf Coast, particularly Louisiana and the coasts of Mississippi and Alabama. After Hurricane Katrina hit the area in 2005, developers have been quick to respond and rebuild or create new retail for the area’s population.

“The Gulf Coast is a sleeper market that performs very well,” says Caruso.

Las Vegas is another strong market, especially high-income suburbs like Summerlin and Henderson. Over the last 10 years, Nevada has had incredible growth because of the number of residents moving to the state. So-called “capital refugees” from California, who have sold their homes for massive profits, are fueling this trend by moving to Nevada because there is no state income tax and the cost of living is lower. Besides Las Vegas, Reno is also seeing positive activity.

In Texas, Jaggi sees increased activity in San Antonio and the Central Valley. NAFTA has increased traffic through the area and national developers have left the market largely untouched.

Anthony Buono.

Hawaii is a market, says Buono, that is “on fire.” Many projects at Waikiki Beach in Honolulu have been remodeled or in some cases new construction, creating a number of luxury and new-to-market retailers along Kalakaua Avenue. The market is strong and performance is exceeding expectations. In addition to luxury retail, power center retail, traditionally hard to locate in Hawaii, is also making a push. Target has been active, recently acquiring a site on Oahu. Walgreens also opened its first Hawaiian store in 2007, and CBRE is working with the drugstore to locate more sites on the islands.

Canada is another part of the Americas that CBRE sees as stable. The increased value of the Canadian dollar has brought about expanded interest from occupiers, and the country has avoided the subprime mortgage issues that has impacted the U.S. market.

In Latin America, Argentina and Brazil are seeing increased retail interest.

“There has been a renewed influence and input in those markets, in addition to Mexico,” says Buono. “They are perceived as having upside and relatively stable. Occupiers are actually driving us to assist them in those markets as they explore opportunities there. There is a pent up consumer demand that hasn’t been met and there are a lot of American and European retailers and restaurants looking for find the right locations to serve those consumers.”

Retailers

In markets where they want to locate, retailers are still willing to pay what the market demands. CBRE’s executives say that rents in large cities seem to be holding their own for Class A luxury properties.

“I can’t think of a high street urban luxury market anywhere in the Americas that isn’t showing increased rents for luxury brand locations,” says Buono. “That may sound counterintuitive, but whether it is Robson Street in Vancouver, Rodeo Drive in Beverly Hills or Fifth Avenue in New York, rent is growing.”

In secondary markets with luxury retailers, Buono does see some softness in the sector. Luxury retailers in those areas tend to see upper middle and affluent shoppers who splurge, when their pocketbook allows, on luxury items, compared to the consistent streams of traffic that luxury retailers see in major markets.

Another sector that is performing well is conventional neighborhood grocers. In 2007, the sector saw one of its healthiest years ever. Many grocery stores have survived the threat of Wal-Mart and Costco on the low-end and Whole Foods on the high end.

Scott Kaplan.

“Grocery stores have cycled through their poor performing stores through mergers and spent a lot of capital expenditure dollars to make the stores look upscale. They’ve also become more comfortable with the urban environment,” says Kaplan. “They’ve really created a niche for themselves; they really bit back at the competition.”

Booksellers, like Barnes & Noble and Borders, could be next on the list for reinvention, says Jaggi. While they are highly sought after retailers, the format itself could benefit from a fresh approach as customers are increasing lured by other distribution channels like the internet.

CBRE’s occupier representation practice continues to grow and has become a major component of the company’s business.

“Retailers are looking at today’s economy as an opportunity,” says Jaggi. “There are plenty of retailers out there that have strong expansion goals.”

Mixed-use

CBRE is involved in more than 75 mixed-use, town center and main street projects across the country. The executives SCB met with see mixed-use as positive for the industry as a whole. CBRE provides leasing and development consultation on many of the industry’s most significant projects, and that gives the firm’s professionals unparalleled insight to offer clients advice on the mixed-use sector.

“We still think there is a gap in the market regarding these mixed-use projects,” says Buono. “Many developers are trying to find the formula of what the right mixed-use project is. It is an evolution, so the market still hasn’t equalized. The projects can be radically different from market to market.”

CBRE recommends developers look at each mixed-use project as an independent project within the market. The retail, office, hotel and other uses in the project should be needed in the market, not just wanted by the developer.

“Where mixed-use gets out of balance is when a developer or city sees a project elsewhere and, because it is successful there, automatically assumes it will work in their city,” says Caruso.

In CBRE’s experience, developers who have the capabilities to develop all of the uses within the project themselves have the ability to create the most successful projects.

“Mixed-use could be an asset class for institutional investors in the future,” says Buono. “Institutional investors are viewing real estate by sector; they may like the retail portion of a mixed-use project, but not the other sectors.”

Developers like OliverMcMillan, who develop their mixed-use projects from top to bottom across all asset classes, integrate them well. “They are helping to create a broad-based acceptance of mixed-use at the institutional level,” added Buono.

Because the trend is so big within its practice, CBRE has compiled all its expertise on mixed-use into a best-practices research book that its professionals use. The brokers also compare notes, since mixed-use is an evolving property type.

One trend the executives also see helping the success of these projects is a hotel anchor.

“Before, you never really thought about a hotel being an anchor to your mixed-use or retail development,” says Buono. “Now, it seems that a hotel becomes a critical component to the underwriting of every project we are a part of.”

Retail As A Changing Business

Like retailers and developers, the CBRE executives that we spoke to also think that their business is evolving. The company’s occupier representation business has been growing faster than its landlord representation business. Retailer representation is now in excess of 40 percent of CBRE’s retail business, and soon the executives predict it will be equal to the company’s landlord representation business.

“Retailers are evolving,” says Caruso. “Today, there are some very large retailers who are retooling how they are executing their real estate. We are seeing a lot more of that business.”

“Most retailers are looking for a company that can reduce their headaches on a local and regional scale,” says Jaggi. “As a result, you will see more small retailers looking for a single service provider to help them manage their growth better.”