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REVIEW SUMMARY
Industry. Commercial Real Estate
Key. Retail real estate appears to be improving in both sales and leasing activity.
After getting a boost from a renewed increase in holiday sales in the fourth quarter, retail property owners may be in for more good news.
Retail real estate experienced an uptick in both leases and sales transactions in the last two months of 2010, and it appears the increase in both the amount of property being leased and the increase in purchase prices for well-located retail properties has stretched into 2011.
For example, CB Richard Ellis' MarketView report for Tampa Bay says the asking lease rate for retail larger than 30,000 square feet stabilized at $15.11 a square-foot triple net in the fourth quarter. Retail sales volume for those large properties in Pasco, Hillsborough and Pinellas counties also increased more than three-fold from a year ago, to $216.6 million.
Rather than attributing the increased activity in leases and sales to a holiday bubble or tax-related blip, real estate experts think the activity is part of a long-term recovery.
“Stronger brands are taking advantage of pricing to expand their presence,” Ray Sandelli, senior managing director in Tampa, says in a press release describing the MarketView. “Though limited, new retailers are entering the market. With the reset in values, investors are increasingly interested in purchasing properties where rents can be attractive and reasonable for tenants and cash flow can sustain the property long-term. We are moving in the right direction.”
Brokerage firm Cushman & Wakefield's research says that vacant sublease space in Tampa Bay has declined from 861,684 square feet at the end of the first quarter of 2010 to 680,683 at the end of the year. Retail users leased 322,748 square feet of vacancy in the fourth quarter alone.
The CoStar Group is reporting that in Charlotte, Collier and Lee counties, average retail vacancy has improved to 8.9% in the fourth quarter down from a high of 9.4% (7.34 million square feet vacant) in the first quarter of 2010. The southern counties also recorded a quarterly net absorption of 329,903 square feet of retail space, the highest net absorption in a quarter since the third quarter of 2008.
The bump is also showing in retail center sales. Plaza Advisors, a Tampa real estate brokerage that specializes in shopping centers, reports that 16 retail centers sold in all of 2009, a number that increased by 28 in 2010.
“Last year, 27 Publix-anchored centers were sold in Florida, nearly 40% of which traded in the last two months of the year,” says Jim Michalak, co-managing partner of the brokerage. “We sold a total of 44 centers in 2010. We seem to be gaining some momentum. Our activity level is still not anywhere near our 2004 and 2007 levels, but we are seeing some positive leasing trends and sales activity.”
There are also more individualized results. Every broker contacted by the Business Review from across the seven-county region reported a jump in buying and leasing activity.
Ian Black, whose brokerage Ian Black Real Estate sold a 6,400-square-foot building on U.S. 41 to the Diamond Vault Dec. 20, says that retailers are finally starting to come out of hibernation.
“There is no question we saw a renewed uptick in activity,” Black says. “The market is all about confidence. The opportunities to make money on the sideline are not plentiful. You either earn 1% or less on your savings or you can go into a real estate deal that will earn you 9% and where you can depreciate the asset.”
Brian Kennelly, president of LWR Commercial Realty, noted an increase in retail leasing activity recently at Lakewood Ranch's retail hub Main Street. The retail center is now 92% occupied.
“We've seen a tremendous increase in the fourth quarter [in all types of commercial],” says David Eckel, president of the large Bradenton-based brokerage Wagner Realty discussing the Sarasota-Manatee market. “This is not just the typical end-of-the-year bump; things are just improving. The business community believes the worst is behind us. Twenty-ten was a good year for us. It wasn't what we saw in 2004, 2005 or 2006, but it has been our best year since then.”
Lee DeLieto Jr. of Michael Saunders & Co. suggests concerns following the Gulf oil spill, starting in April 2010, pushed off some real estate closings until later in the year. He says it personally delayed the sale of the historic Carman's Shoes building on St. Armands Circle in Sarasota. In December, that sale was one of three prominent retail buildings on St. Armands Circle that DeLieto Jr. and his father/ real estate brokerage partner Lee DeLieto Sr. closed.
“It really comes down to people getting accustomed to the market again,” says DeLieto Jr. “We are starting to see a few people doing five-year leases, which was just unheard of a year ago. People were only signing one- or three-year leases. It's still just a smattering, but it's there.”
Mike Carr, regional director of Southwest Florida for Coldwell Banker Commercial, chalks up the improvement to the national elections in November. Looking just at the Naples market, he's seen Lowe's moving forward and opening its long-planned home-improvement store in south Naples, improved activity at the Mercato, hhgreg entering the market and a growing number of new restaurants. He points to the November election as the turning point.
Carr joined a chorus of real estate professionals who attribute the increase in retail activity to a jump in optimism; a belief that the general business environment is improving.
This optimism has also appeared in two surveys from the University of Florida. UF's Florida consumer confidence survey recorded a seven-point jump to 77 in January to its highest level since April 2010. The study showed large gains in several retail-friendly areas, such as perceptions of U.S. economic condition over the next year and five years, buying big-ticket items and expectations of personal finances a year from now.
UF's fourth quarter Survey of Emerging Market Conditions was even more encouraging. The statewide survey of Florida professional real estate analysts and investors found the outlook had improved greatly for office and retail occupancies, land investment and capital availability.
But before celebrating, it's important to note the change has been slight and nowhere close to increases seen during the boom from 2005-2007.
Patrick Berman, senior director of retail brokerage for Cushman & Wakefield of Florida Inc., says 2010 was a 50% improvement from a year ago. But he also says sales declined 85% from 2006 to 2009.
“So far we are predicting that 2011 will be a 100% increase over 2010,” Berman says. “We are still way below the peak. Twenty-ten was still a third the level of 2006.”
But there is reason to believe that the uptick is more than temporary. Berman says the national sale of all commercial securitized loans is following a similar recovery pattern.
“In 2009, there was less than a billion dollars sold,” he says. “In 2010, it looks like $15 billion in commercial mortgaged-back securities were sold, which is a huge leap. This year $20-$30 billion is projected to be sold. So consumer confidence is up.”
For now, the commercial market is still the realm of the well-heeled and deep-pocketed commercial investor. Although some highly discounted and unique properties have found conventional bank financing, most buyers are paying cash or using some form of seller financing, including assumed debt.
“But good retail projects will get financed,” Carr says. “I don't think financing for most retail of any consequence is that difficult. Mostly of these are sophisticated developers. Wealthy baby boomers are still heading south. This winter up north should help us tremendously.”
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