The recession is changing the face of retail, shifting focus away from the once popular “lifestyle” shopping centers with upscale storefronts to the more modest offerings of discount chains. Businesses like Family Dollar, Dollar General and food discounter Aldi are surging forward, opening hundreds of new stores where fancier fashions once thrived. Bargain prices on retail real estate are making it easier for discounters to expand, and consumers still hurting from the recession are responding favorably. For more on this continue reading the following article from National Real Estate Investor.
With retail bankruptcies continuing to mount — Blockbuster and Borders Group are the latest, leaving hundreds of storefronts vacant — new development has retreated into an eerie calm. It’s the rare shopping center being planned anywhere today.
Some merchandising experts predict it could be years before the U.S. marketplace requires new sales space. With $5 a gallon gasoline a new reality in some locales amid sharply higher prices at grocery stores, many observers fear that consumer spending for apparel and electronics might soon evaporate.
Yet despite the doomsday talk, a nascent optimism is taking hold in retail as one merchant after another prepares ambitious expansion programs not seen in several years. Much of the expansion comes from discount retailers. Dollar General plans up to 650 new U.S. stores this year, Family Dollar 300 stores, and Save-A-Lot, 100 stores, according to a new report from the Terranomics division of Atlanta-based ChainLinks Retail Advisors. The women’s wear retailer Ross Dress for Less plans 60 stores.
That discount stores, and notably the dollar branches, are leading the expansion charge comes as no surprise to John Melaniphy, a Chicago retail consultant who follows the discount sector closely.
“No matter what economists say, we’re still in a recession and just gradually working our way out of it,” he observes. “Price is a very important factor in retail everywhere. Everybody wants to grab a piece of the frugal shopper market. That’s where the action is.”
The U.S. retail sector overall is on track to outpace 2010 sales, according to Terranomics. In early 2010, retail chains planned 13,500 new stores and shops, the lowest level in a decade. This year the outlook is for 21,000 new stores, nearly matching the 2007 total, though still 16% off the frothy peak of 25,000 new chain stores in 2006.
CVS is opening 275 stores. Indianapolis-based electronics retailer hhgregg is moving into empty Circuit City stores around the Midwest and Southeast as it opens 60 stores this year and plans hundreds more in coming years. Wal-Mart will open nearly 400 stores in North America over the next 30 months. Many are downsized boxes in cities like Chicago and New York.
“This is shaping up to be the biggest year in retail expansion that we’ve seen in 20 years,” says Garrick Brown, research director for Terranomics.
“Wal-Mart alone is looking for 50 new store sites in just Los Angeles. There’s something major going on.”
Investors seize deals
With little new space coming to market, shopping center vacancies have likely hit their high-water mark and will trend down. It seems almost certain that the worst is past. Investors in retail real estate are lining up deals for properties whose value has been beaten down, as they assume pricing won’t fall further. The expansion list is endless. The 7-Eleven chain wants to build 350 stores this year. Discount grocer Aldi plans 100. AT&T wants 100 new cell phone stores.
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Growth will be strongest in Washington, D.C., Baltimore, San Francisco and Chicago, says Brown. “Retail rents are down 40% in cities like San Francisco. Retailers are in a rush to land space while they can.”
Five Below, which stocks products priced under $5, was due to open 10 stores, each close to 10,000 sq. ft., in a single day in early May in Chicago, then open another 10 in the market by the end of the year.
The Philadelphia-based company raised $100 million from private-equity investors last year and is eager to broaden its reach in the Midwest. Five Below opened 40 stores last year, and envisions 50 this year and 60 next year.
“We’ll use Chicago as a launching pad to expand further to Detroit, Milwaukee and Minneapolis soon,” says David Schlessinger, Five Below executive chairman. “Last year was probably the peak of availability of retail space, but we’re confident there will continue to be space available for the next few years.”
Maybe not, if everybody else also keeps expanding. “Retailers have done all the cost cutting they can at this point, and now they’re looking to add assets again. They’re under pressure from Wall Street to grow,” asserts Will Ander, a senior partner at retail consultancy McMillan Doolittle LLP in Chicago.
Vacancy rates fall
As of March, U.S. retail sales had been rising for nine months in a row, notes Melaniphy, and chain store executives are clearly encouraged. “There is more optimism in the retail world,” he says. “But it’s not dynamic yet. We won’t roar back in this recovery as we have in others. Yet people are starting to spend money on themselves again.”
At the end of 2010, U.S. retail vacancy stood at 7.2%, down from 7.4% at the end of 2009, reports Jones Lang LaSalle, as landlords pushed through 50 million sq. ft. in net absorption, spurred by an average 4% fall-off in rents.
Some sectors are doing better than others. Malls were just 5.8% empty as the year began, while community and neighborhood centers were saddled with nearly 11% vacancy. New York had a mere 1.9% vacancy rate compared with 5.1% for Boston and 10.3% for Atlanta.
Abigail Rosenbaum, a senior economist with brokerage CB Richard Ellis in Boston, believes vacancy rates would be worse if developers hadn’t turned off the spigot for new construction when the economy began to tumble.
Researcher Reis says new retail construction in the U.S. peaked at 34.5 million sq. ft. in 2005, receded to 24.5 million sq. ft. by 2008, then plummeted to 4.1 million sq. ft. last year, a 30-year low.
Rosenbaum projects 4 million sq. ft. in new construction this year and gradual recovery to 18 million sq. ft. in 2016.
But Sam Latone, president and co-CEO of the Shopping Center Group in Atlanta, an advisory firm that works with retail chains, sees a faster pace. Quality spaces vacated by bankrupt firms such as Linens ’n Things are drying up. Vacancies are heaviest in small spaces of 10,000 sq. ft. and less, Latone argues, and space is tightening in Class-A shopping centers, while Class-B and Class-C centers have a harder time leasing up.
Development at last
“National retailers are feeling a pressure to grow right now,” declares Latone. “The debt markets are recovering faster than anybody realizes. We’re at a low point in construction just at the time that demand is rising. At some point new development will be triggered. It’s not a question of if, but when.”
The time may be now. Shea Properties, based in Aliso Viejo, Calif., will complete a 600,000 sq. ft. retail center this year called the Collection at RiverPark in Oxnard, Calif. Originally slated to open in 2009, it got held up by the recession.
Now anchors are piling on, with Target, Whole Foods, REI and Century Theaters all taking space. Meantime, Shea has a more modest center of 36,000 sq. ft. under construction in San Diego. “It’s been a tough journey to get these centers done,” says James Williams, a vice president at Shea. “It has been a battle to get tenants to sign on the dotted line. But we’ve seen some thawing among tenant prospects recently. There is more interest in new spaces.”
For the Eddie Merlot’s restaurant chain, based in Fort Wayne, Ind., construction also won’t wait. The company, a steakhouse concept requiring up to 15,000 sq. ft. per unit, is building store sites in Chicago, Denver and Miami and negotiating for sites in Kansas City and Minneapolis. William Humphries, president and CEO of Merlot’s parent Platinum Restaurant Group, sees customers increasingly willing to spend $50 and more on prime steaks.
“With the economy down in 2009, we stopped our expansion,” points out Humphries. “Now is the best opportunity to grow that we’ve seen in a long time. We won’t put off new construction any longer.”
Jones Lang LaSalle estimates sales of U.S. retail properties totaled $22.6 billion in 2010, up more than 50% from the cyclical low of $15 billion in 2009.
With Australian retail giant Centro Properties Group announcing in March that it was selling off its U.S. shopping center assets for $9.4 billion, Greg Maloney, the president and CEO of Jones Lang LaSalle Retail, predicts that transactions this year will surpass $30 billion and could reach $40 billion.
Michael Phillips, managing director of Atlanta-based Jamestown Properties, states that “this is a very good time to invest in retail real estate.” Late last year Jamestown, which has $4 billion to invest, bought Alameda Towne Center near Oakland, Calif., for $181 million, nearly $300 per sq. ft.
Anchored by Safeway and Trader Joe’s, it was 91% leased. Adjacent land can accommodate a 60,000 sq. ft. expansion. The buyer leveraged 60% of the deal with debt from J.P. Morgan Chase.
“Our initial cap rate is between 6% and 7%. A year earlier it might have been 75 basis points higher, but we’re living in a world now where cap rates are low and good real estate is hard to find,” says Phillips.
Retail expansion into exurbia has gone out of fashion. Today, retailers want guaranteed population density. Jonathan Hipp, president and CEO of brokerage Calkain Cos. in Reston, Va., is fielding calls from developers.
“They’re talking about building new centers again, about getting back into the game,” says Hipp. “It’s not near the intensity of conversations I had with developers at the peak five years ago. But it’s a start. In a retail recovery you have to walk before you can run.”
This article was republished with permission from National Real Estate Investor.