Real Estate Forum - May/June 2009

of vacancy. Stabilizing these properties either for continued ownership or sale has become a growth industry for management firms and brokerages.

“We’re counseling and advising, having to do more than a brokerage operation would do,” Walter said. “It’s going to be a total roller coaster. There is a flight to quality, a flight to geography.”

Levin, in fact, has taken on projects where little or no paperwork existed and has stabilized occupancy while calming the fears of existing tenants. “There’s no great secret,” Harding says. “What impacts our business is supply and demand.”

“There is no way to fix this
complex an issue. Until
financing gets settled, we’re
going to see difficult times.”

RICHARD WALTER

FARIS LEE INVESTMENTS

One thing’s (almost) for sure: there certainly won’t be an oversupply issue. Developers are expected to open 90 million square feet of new retail space in 2009, the lowest growth figure since the mid-1990s.

Simon, the nation’s largest shopping center owner/devel-oper, has halted new development beyond what is currently under construction, and CEO David Simon has noted in analyst calls that new construction will be dead for years. This year, the company will open Cincinnati Premium Outlets in August and the second phase of the Domain in Austin in the fourth quarter. Domestic capital expenditures in 2009 will total $250 million, less than one-third of its 2008 level. In 2010, that sum will drop to $50 million. “Our executives say the focus in 2009 is on cash flow generation,” says Les Morris, a spokesman for the retail REIT. “We’re going to hoard and warehouse until there is some clarity.”

The slowdown will allow for space to be absorbed, improving vacancy levels over time and, in the long run, could set up a slingshot effect, Colliers’ Duffy notes, when existing space is filled and retailers need more. “The delivery of new space will be grinding to a halt, and the US population is growing,” he observes. “Retailers can only grow so far through increasing same-store sales.”

Ironically, contends Harding, now is a terrific time to be building. Municipalities desperately need the revenues and may be more encouraging toward developers. Federal stimulus funds may also help with necessary infrastructure improvements.

“The situation is not going to get better if new development doesn’t start up,” Villasenor says. “With the lack of new development, sales tax revenues are dropping through the floor, and that affects property tax values.”

As financing remains elusive, developers should focus on entitlements, he advises. “We’re looking at future development to be ready three to five years from now.”

Having said that, most observers concur that the pain is going to increase in the short term, with higher vacancy, lower rents and little transaction activity. The good news over the long term is that the industry is setting itself up for a stronger future on more realistic financial expectations, whereas in recent years, rents were based more on construction and land costs, as well as the developers’ desired rate of return, rather than what the market would bear, notes Marcus & Millichap.

30 REAL ESTATE FORUM MAY/JUNE 2009

“Since many new centers now have significant vacancy rates and construction and land costs have abated, establishing ‘market rents’ for these properties in the quarters ahead will be key to redefining investment values,” the firm says.

As leases become more reasonable and retailers have little new space to consider for growth, supply and demand will achieve a new balance.

“Despite the most challenging market conditions in nearly two decades, retail will continue to reinvent itself,” according to C&W. “If there is a silver lining to this downturn for property owners, it’s that retailers are now more inclined to rent their space rather than build new stores to improve their balance sheets. As property owners refocus on improving existing portfolios, this trend will help moderate vacancy losses from the increased level of store closings. This chain of events will ultimately place many owners in a more stable, competitive position once the market improves.”

And gradually, the acquisitions market should come back to life, especially in the always-popular neighborhood/community center sector. Cap rates on newly listed retail properties are up approximately 25 to 50 basis points from year-end 2008, notes Marcus & Millichap—an indication that sellers have become more willing to adjust pricing expectations to clear the market. The firm anticipates further correction through 2009.

At the end of the day, the key question is: When will the overall recession end and lure shoppers back into stores? Few were willing to predict a date, preferring to discuss circumstances rather than a timeline.

Harding notes that shoppers who’ve stayed away from stores for the past few months are building up demand, and are waiting for the economy to turn a bit. “The holiday season is the barometer,” he says.

“There’s no way to fix this complex of an issue” within a year, Walter states. When sales rebound a bit, he adds, retailers will begin seeing expansion opportunities. Financing, however, will continue to be a major factor. “Until financing gets settled, we’re

“The retailers who have capital
to open stores are finding ready,
willing and able landlords in
terms of deals being cut.”

J. PATRICK DUFFY

COLLIERS RETAIL SERVICES GROUP

going to see difficult times.”

The key will be housing, which led the United States into the recession and—many believe—will be the way out.

“This is the first housing-led recession we’ve ever had,” says Colliers’ Milano. The first sign of improvement, he adds, is “when we start seeing absorption and home sales trending upward. The second is employment; people must have the money to spend. It will be a different market, but there’s a lot of pent-up demand.”

Even Southern California, one of the regions hit hardest by the housing collapse, is poised for a rebound, Villasenor says. San Diego’s economy, in particular, is focused more on growth industries such as biotechnology, and vacancy in the older, more urbanized areas has been below the national average.