Retail real estate is improving on the Gulf Coast, but mostly in the best locations. Population and employment growth will spur increased demand.
Every shop owner wants to be located at the corner of Main and Main.
That's why the best retail locations in the region from Tampa to Naples are commanding rents not seen since the real estate boom — that is, if they have space to rent.
Buildings with space in areas such as Dale Mabry Highway in Tampa, State Road 60 in Brandon and U.S. 41 in Naples are filling up as consumers start spending again. Recent data from market tracker CoStar Group shows vacancies in the single digits and rents beginning to rise in many areas of the Gulf Coast (see chart).
“About two years ago, people who had good businesses were moving off the secondary and tertiary streets onto the main streets where they could get higher visibility and lower rents,” says Bruce Preble, broker and owner of Commercial Realty Specialists in Cape Coral. “That phenomenon occurred all up and down the seaboard here.”
Now, competition for the best space is increasing as the economy improves. That's one of the first signs of a recovery in this sector.
New tenants moving into the market are fast-casual restaurants, gyms and stores that sell discounted merchandise. Even doctors are moving into retail space, driven to those locations for increased visibility because they need more patients to offset shrinking government and insurance reimbursements, brokers say.
Retail sales have been rising this year. For example, the state's index of retail activity increased 5.8% in May compared with May 2011, according to the latest data from the Florida Legislature Office of Economic & Demographic Research. The index, which tracks taxable sales of consumer goods, auto sales and tourism spending, has posted increases in every area of the Gulf Coast in May, from 4.6% in Naples to 4.9% in Fort Myers, 5.4% in Punta Gorda, 6.4% in Sarasota-Bradenton and 6.5% in Tampa-St. Petersburg.
“Florida has returned to being a growth state,” says Stan Rutstein, a broker with Re/Max Alliance Group in Bradenton.
Real estate investors are actively pursuing well-located shopping centers because of the improving vacancies, rising rents and the fact that there hasn't been meaningful development in five years. “If you're an institution or individual investor looking for a conservative return, real estate is looking pretty good right now,” says David Conn, executive vice president and southeast director of the retailer services group of CBRE in Tampa.
For example, a recent CBRE report on the Tampa Bay area's retail sector noted that Publix-anchored shopping centers are selling for prices comparable to the height of the market from 2003 to 2007.
When Colliers International Southwest Florida sought bids for the Island Park shopping center on U.S. 41 in south Fort Myers recently, 50 investors signed confidentiality agreements to receive an offering memorandum and eight of them presented contracts, says Karen Johnson-Crowther, managing director and principal with Colliers International in Fort Myers. “The interest is coming from all over the U.S.,” Johnson-Crowther says. “Florida is on sale.”
The best locations
The recovery in retail space has been uneven, however. While the best locations are benefiting from increased demand, such isn't the case for weaker locations where there's less traffic and fewer residents.
“There has never been a bigger bifurcation of rents as there is today,” says Jim Kovacs, managing director of retail services for Collier International Tampa Bay.
Rents can even vary within the same shopping center by 50% to 70%. That's because tenants want visibility from the street and direct access from the main roads. “The good real estate is drying up dramatically,” Kovacs says.
Weaker locations continue to suffer. During the residential boom, many retailers surged into less-populated areas betting that rooftops would follow. “Those tenants are now moving out,” says Preble.
But even populated areas were hurt by the downturn. Preble says Cape Coral's population fell 8% during the bust after retailers gobbled up thousands of square feet of newly built space along Pine Island Road and other busy corridors. “That's a big chunk of the population,” he says.
Stung by the downturn, retailers now only want the best locations. They're looking for areas with people who are employed and educated. Kovacs ticks off some of the communities that fit those characteristics in the Tampa Bay area: South Tampa, Carrollwood, Brandon, Palm Harbor, New Tampa and Wesley Chapel. “Those are the markets that are active and have good occupancy levels,” he says.
The tenants that are expanding along the Gulf Coast are the ones you'd expect to do well after an economic downturn: fast-casual restaurants such as Panera Bread, dollar stores, auto-parts stores (people are keeping their cars longer), 7-Eleven and Wawa convenience stores, and discount retailers such as T.J. Maxx, HomeGoods and Marshalls.
The tenants seeking space now are either well-established retailers or franchises. “Casual dining is far and away the strongest category out there,” says Rutstein. “The weakest category is the small, owner-operated, mom-and-pop retail store that traditionally would fill vacant strip-center space. They can't exist due to lack of credit and capital.”
Kovacs says the best barometer for how the market is faring is who is asking him to fill space. “In the past two years, tenants have been asking me for space,” he says. By contrast, during the downturn “every landlord was knocking on the door asking us for help.”
Johnson-Crowther says her firm has helped banks manage repossessed shopping centers and she's seen tenant financials improve significantly. “That's why we're seeing more activity in the market,” she says. “I'm busier now than I've been in the last five years.”
“The high-end segment is doing pretty well,” says Conn, citing retailers such as Nordstrom. By contrast, mid-market retailers such as J.C. Penney and Kohl's struggle. “The Internet is taking a bigger and bigger chunk of peoples' business,” he says.
Despite the improving real estate and employment statistics this year, retail tenants are cautious because their customers remain wary. “This is not a very strong recovery and consumers know that,” says Conn.
“The traditional retailers are very concerned about the stability of the market. Is the worst in front of us?” says Rutstein. “Retailers have to have the vision to look over the mountain.”