Retail Goes Downtown
Investors pursue opportunities in the heart of the city.
At the Chatham Market
retail center on Chicago’s South Side, shoppers may be surprised to find a new
convenience store tucked in next to a Potbelly’s sandwich shop this summer:
Walmart Express. Slated to be its first urban location, the store will occupy a
mere 10,000 square feet. Walmart plans to open more than 30 small-format stores
in U.S. cities this year.
And it’s not the only major
retailer setting its sights on urban markets. Target plans to open 10
small-format CityTarget stores by the end of next year, and Best Buy expects to
add 150 Best Buy Mobile stores in fiscal 2012.
This growth strategy makes
sense, since more than 80 percent of the U.S. population resides in urban areas
and convenience is highly valued by shoppers. But it also represents one of the
fundamental changes in the retail property market landscape. And investors are
“The majority of the
investors I talk to are focused on urban infill, value-add product with
maturing leases and a need for new physical plant,” says Bill Rose, Western
regional director of Marcus & Millichap’s National Retail Group. “Walmart’s
grocery concept is a huge sign of the direction things are going.”
This boost in interest
reflects a wider improvement in the sector. In 2010, the retail property market
saw a 41 percent increase in sales volume to an estimated $47 billion,
according to Marcus & Millichap, which forecasts an additional uptick of
more than 25 percent this year. Blackstone Group’s recent $9.4 billion purchase
of Centro Properties Group’s U.S. shopping center portfolio is a clear
benchmark in this upward trend.
The growth in retail
investment sales, small and large, indicates that a recovery is on track. But
as online shopping increases and owners compete for traffic, a revitalized
retail property market may look quite different than it did just a few short
years ago. Like the major retailers and sector investors, CCIMs are adjusting
their strategies accordingly.
Summer in the City
Across the country,
single-tenant net-leased properties and investment-grade anchored shopping
centers remain the go-to retail investments. “Both are hot items and a dearth
of product is driving them togenerate capitalization rates in the range
of 6 percent or 7 percent in most major markets,” says Cynthia C. Shelton,
CCIM, CIPS, CRE, director of investment sales for Colliers International in
Orlando, Fla. “Those without credit or that aren’t single-tenant triple-net are
all over the board in cap rates, from 8 percent to 12 percent, and hard to
In many markets, this
flight to quality follows a path toward urban centers. Like Rose, Nancy L.
Miller, CCIM, vice president of Bull
Realty’s National Retail Group in Atlanta, has seen a recent boost in sales of
small-box single-tenant net-leased properties under $2 million near the city’s
central business district. Two types of investors are competing for these
assets, she says: “older investors who are sitting on cash earning little and
real estate investment trusts looking for somewhere to park monies at a higher
yield and greater stability than multitenant retail.” At the beginning of the
year, these properties were seeing cap rates in the low 7 percent range. Miller
also has noticed an influx of townhouses in the city core, which she expects
will strengthen retail growth.
Some suburban transactions
will be spurred by opportunistic investors capitalizing on attractive
per-square-foot prices and first-year yields, which have surpassed net-lease
cap rates in Miller’s market by as much as 100 basis points, according to
Marcus & Millichap. But the outer reaches of the urban landscape generally
won’t see a lot of action this year.
Where hot product isn’t as
plentiful, CCIMs are focusing on community connections to spark retail
transaction growth. The Pittsburgh CBD, for example, is experiencing a major
influx of residential tenants — most of them newcomers to the city. “Demand for
my lofts is about one year out, and some owners have upward of 100 tenants
waiting,” says Diane Baer Yecko, CCIM, a broker with BT Property Associates in
Once all of these people
find a place to live, they’ll eventually need to eat. Or at least that’s what
restaurateurs are counting on. Second-generation opportunities and aggressive
landlords helped spur a flurry of activity in the second half of 2010, with
Sharp Edge Bistro, Nathan’s Famous, Elements Contemporary Cuisine, Tavern 245,
and others setting up shop in the Pittsburgh CBD, Grubb & Ellis notes.
Yecko works with the
Pittsburgh Downtown Partnership, which uses incentive programs to attract
retail owners and tenants to small downtown spaces. Through its Vacant Upper
Floors program, the PDP recently funded the owner of a 2,000-sf sushi
restaurant on Forbes Ave., currently a hotbed of retail development. The owner
converted the upper floors to residential lofts, which immediately were rented.
“At present the PDP only funds projects after the owner secures financing for
the retail portion, but we’re considering changing that so we can be the first
lender for qualified owners,” Yecko explains.
Mixed-use retail and
restaurants also are attracting attention in the East San Gabriel Valley
submarket in Los Angeles, where John Hsu, CCIM, CPM, chief executive officer of
STC Management in Whittier, Calif., primarily focuses on serving the growing
Asian-American community. “Several large pieces of commercial land recently
traded in our area, and the owners have been discussing mixed-use development
options with us,” Hsu says. “And restaurants continue to be one of the most
vibrant retail segments in our area. If a shopping center can secure popular
restaurants, its chances of success increase tremendously.”
Strong retail centers cater
to the needs of the consumer, Hsu notes. This is especially important in an
area where traditional Caucasian centers have attracted traffic from nearby
Asian communities. Retail deals in Hsu’s submarket are trading at below 6 percent
cap rates — and as low as 4 percent — with multiple offers from Asian
investors. In addition, owner-users are taking advantage of Small Business
Administration loans and lower property prices to buy instead of lease.
“We have differentiated
ourselves from the competition by launching an extensive marketing campaign and
working hand-in-hand with owners and tenants,” Hsu says. “We believe that by
helping the people and establishing synergy with the community, shopping
centers will thrive regardless of the economic climate.”
Many consumers, still
reeling financially, are relying on discount retailers — and discount retailers
are relying on them. Dollar General and Family Dollar top the expansion list
this year, with plans to open 625 stores and 300 stores respectively, according
to Marcus & Millichap. And unlike many other retailers, this is one segment
that is active in both urban and fringe/suburban markets.
In Waterbury, Conn., Tom
Hill III, CCIM, SIOR, broker with Tom Hill Realty & Investment LLC, is
seeing an influx of discount retailers, including professional consignment
shops and no-frills grocers such as Aldi. Driven by the market’s 10 percent
unemployment rate, “these single-digit rent payers are filling the vacancies in
better strip centers,” Hill says.
But consumers aren’t the
only ones looking for discounts. Investors are sniffing around fringe/suburban
areas in search of attractively priced distressed properties. So far, however,
product has been slow to come to market, as extend and pretend is still a
popular strategy. “With distress, I’ve gone to court with owners and their
attorneys to testify that the market is awful and plead with the judge for a
reasonable extension,” Hill says. “It works with many judges!”
Nicholas L. Miner, CCIM,
vice president of investments with Commercial Properties in Scottsdale, Ariz.,
expects more distressed properties to come to market this year. “With the new
reality of where prices are, I foresee more foreclosures, which will allow the
property to reset and start at lower rent rates because the basis in the
property is lower,” he explains. However, Marcus & Millichap reports that
most non-lender distressed sales in small markets are expected to be restricted
to low-quality assets with limited discounting.
Until significant job
growth returns, small retail shops in secondary and tertiary markets will
continue to challenge brokers and owners. While major chains are reporting
strong numbers, small retailers’ lackluster performance will keep the overall
retail vacancy rate from dipping more than 20 basis points to 9.8 percent in
2011, according to Marcus & Millichap.
“It is going to be a slow
recovery,” Miner says. “For centers on the outskirts of town, it will take
years to absorb the space because the housing markets in those areas are still
In the meantime, how can
commercial real estate professionals in these markets preserve asset values and
drum up investment interest?
Hsu suggests filling as
many vacancies as possible by any means necessary. This may include low rental
rates for shorter terms, owners opening their own businesses in centers,
month-to-month leases, and hourly rentals. “Vacancies must be addressed because
they can sometimes have a domino effect on the rest of the property,” Hsu says.
“Furthermore, lenders have also been shying away from properties with higher
vacancy rates, even if the current cash flow is more than sufficient to cover
It’s also a good idea to
set aside money for tenant improvements. “Savvy tenants don’t just want free
rent when they move into a space,” Miner says. “Every dollar tenants invest in
TI is one less dollar they have to make their business successful and redeploy
Current tenants also may
still be feeling the recession’s effects. “Learn more about the health of your
tenants,” says Henry Englehardt, CCIM, senior vice president with Colliers
International in Walnut Creek, Calif. “Find out if they’re hurting on the top
line or the bottom line, and make decisions about rent concessions based on
where they’ve taken the hit.”
Also, Englehardt adds,
“understand tenant options and the reality in which you’re competing.” If
nearby owners are given the chance to lure a tenant away, they’ll probably take
And whether dealing with a
distressed property on the edge of town or a sparkling single-tenant net-lease
building in the heart of the city, protecting one’s own asset is paramount.
“The future depends on CCIMs’ ability to stay in business during this tricky
time,” Hill says. “I’m doing broker price opinions, small leases, keeping all
my big deals going during re-trades and extensions, appearing on two different
radio stations, and getting all the public speaking gigs I can show up for. You
have to keep your name out there, renew your listings, and keep canvassing and
asking for the order!”
Rich Rosfelder is associate
editor of Commercial Investment Real Estate.
Schooling Retail Specialists
In March, Cynthia C.
Shelton, CCIM, CIPS, CRE, director of investment sales for Colliers
International in Orlando, Fla., taught courses and participated in panel
discussions as dean of the College of Financial Analysis at the International
Council of Shopping Centers’ University of Shopping Centers master’s program.
Commercial Investment Real Estate asked her to discuss that event’s hot
CIRE: What retail sector
challenges were ICSC University program attendees most concerned about?
Shelton: Finding product
and financing to close deals is still difficult. That said, all of the students
said they are busy and optimistic about a market comeback. They’re also seeing
limited (or no) new construction except among discounters such as Dollar
Redevelopment is the new development. Investors are looking for tired
or distressed centers and trying to purchase at a price that allows them to
hold and reposition as the market recovers.
CIRE: What advice did you
share with them in your courses and panel discussions?
Shelton: Work on motivated
sellers as well as buyers with realistic expectations and the ability to
perform.Most of the real deals are gone, yet some buyers still believe
they can purchase quality investment assets at below replacement cost: That’s
not happening. The few properties that are selling below replacement cost
require cash to hold and reduced rents or adjustments to keep tenants.
CIRE: Are you seeing any
signs that point to an impending recovery in the national retail market?
Shelton: Retailers are
starting to expand again but at a much slower rate.Many retailers, such
as the discounters, are able to get space at affordable rates now compared with
three years ago. Rental rates seem to be stabilizing in many markets, but some
other markets are still seeing drops and renegotiations upon renewals/options.
All in all it appears as if
many markets are starting to recover or at least stabilize.A few areas of
the country are struggling — especially Ohio, Michigan, and other places where
job growth is weak.
CIRE: How has your CCIM
education helped you face challenges unique to the retail sector?
Shelton: The education has
helped me get to the basics of investment analysis and not get caught in the
ups and downs. The fundamentals of real estate are: market rental rates, market
absorption, price per square foot, tenants expanding, and available financing.
These items seem to get out of whack and require a turn in the market. We just
came out of that and have to wake up and rethink.Real estate is a
long-term investment, not a short-term flip like stocks!
The other great
benefit is the contacts in the CCIM world. The networking connections are
powerful and have helped me get necessary information and market knowledge to
assist in acquisitions and dispositions or sometimes just to determine a direction
for me or my client.