What the retail sector can expect in the coming year.
To say the retail sector struggled during the Great Recession and its aftermath would be a massive understatement. Of all the commercial property types, retail facilities arguably became the sickest when the economy collapsed. Last year, however, the patient began to stabilize.
That was the consensus of a panel of experts on the "Commercial Real Estate Show" radio program. The program discussed the sector, examining investment sales, development trends, retailers that are expanding and more.
Stopping the Madness
"We definitely moved into a period of stabilization [last year]," said Dan Fasulo, managing director of Real Capital Analytics. "We're not seeing huge declines in occupancy anymore, not really seeing rents plummeting. There might be certain submarkets that are still pressured, but all in all, fundamentals have stabilized."
Furthermore, the sector should continue to improve gradually in the year ahead, Fasulo added. "I think we'll see incremental growth," he said. "The U.S. economy is like a big ship – once it's going in the right direction, it's hard to turn back around."
Bob Simons, a partner with the Hartman Simons commercial real estate law firm, said the overall mood of the industry has improved considerably. "There's an increased confidence," he said. "There's confidence from the consumers – [they] are starting to spend more money out there. There's increased confidence from the equity markets. Going back to 2009-2010, the equity markets were running as fast as they could from the retail sector. They're starting to come back, and valuations are starting to stabilize, improve, which brings lenders back to the fold."
Accordingly, the pace of investment sales in the retail sector is starting to quicken. "In your gateway cities, we've seen a massive amount of capital, both on the equity and debt side, flow into retail real estate," Fasulo said. He added that investment activity in the six largest metro markets increased 54 percent in 2012 on a year-over-year basis.
However, lower-quality retail facilities in smaller cities can remain a very tough sell, Simons noted. "If you're the best site [in a secondary or tertiary market], you're okay. But, if you're not one of the top two positioned [retail] properties in that market, you're going to be in trouble. That gap [in investor demand] is going to continue to widen."
Despite the overall uptick, the sector faces other issues as well, and filling vacancies in some centers can remain a challenge. John Crossman, CEO of Crossman & Co., said his firm often has to get creative to fill the retail properties it leases. "We're being very proactive on non-traditional uses," he said. "Maybe there's an office tenant that comes into a retail space. We're [finding] medical [tenants], which can be very helpful, and we've had churches come into shopping centers."
The Changing Face of New Development
The radio guests said the sector is to the point where some new development is feasible, but Jeff Fuqua of Fuqua Development said new retail properties will be a good deal smaller than the suburban power centers of the past, will incorporate other uses such as residential, and will be located in intown or dense suburban environments. Contemporary retail developments are "smaller, more complicated, more expensive – [they're] different," he added.
Lenders haven't necessarily established absolute pre-leasing requirements, but Fuqua's firm has an internal goal of getting 70 percent of its targeted net operating income in place before construction starts on a property and its loans close.
Sporting-good chains and specialty grocers are adding sites aggressively, while home-improvement retailers have been stagnant when it comes to expansion. For specific tenants in expansion, click here to listen to the show audio.
As a closing tip, Jeff Fuqua suggested listeners to not get into in-town or dense suburban mixed-use development. He said the zoning, costs and complexity is off the charts. When I asked what he would say to them if they still want to, he said in an impressively good Clint Eastwood impression, "Go ahead; make my day."
— Michael Bull is the host of America's Commercial Real Estate Show, which addresses a variety of topics every week that confront the real estate industry. Additional episodes of the show are available for download at www.commercialrealestateshow.com.