|
COVER STORY, JANUARY 2009
BOSTON RETAIL ROUNDTABLE
Diversity aids New England retailers as they look to the long term.
Moderated by Jerry France and Randall Shearin. Edited by Coleman Wood.
 |
Legacy Place in Dedham, Massachusetts.
|
|
The Boston retail market has had its share of woes, but overall, high barriers to entry, its infill nature and promising long-term results keep the New England retail market strong. Northeast Real Estate Business recently sat down with retail experts from the metropolitan Boston area at the Boston office of Goulston & Storrs to discuss the dynamics driving and affecting the Greater Boston retail sector. Attendees included: Bryan Anderson of Atlantic Retail Properties, Jason Weissman of Boston Realty Advisors, David Locke of CBL & Associates, Dean Stratouly of Congress Group Ventures, James Koury of Jones Lang LaSalle, Don Mace of KeyPoint Partners, Bob Sheehan of KeyPoint Partners, William Beckeman of Linear Retail Properties, Ted Chryssicas of Colliers Meredith & Grew, Thomas Wilder of The Wilder Companies, Brian Sciera of W/S Development, Mark Roberts of W/S Development, Michael Sleece of Wachovia Bank, and Doug Husid and Martin Glazer of Goulston & Storrs.
NREB: Bob [Sheehan] could you start us off on some stats for the market?
Sheehan: Based on the database that we maintain, there was about 181 million square feet of retail space in the market as of spring 2008, and that’s up about 1.4 percent from a year ago. There is some net positive absorption going on in the market, which is a good thing. Vacancy rates climbed effectively from about 6.1 to 6.9 percent over the past 18 months or so, which I believe is probably doing a little bit better than the nation as a whole.
NREB: There has been a lot of new development that was announced here in the last 3 to 4 years. How would you say that is coming along? Is the demand still there for these new projects?
Sciera: Our property in Lynnfield (Meadow Walk at Lynnfield) is going well. We’re scheduled to open in 2010. Of course, things aren’t going as fast as they were 2 years ago, 18 months ago, or even a year ago, but leasing is going well. Because of the strength of the location on 128 and the real estate, it will be a great project. We’re obviously still bullish on the market, and the projects that aren’t out of the ground are just going to take a little bit longer to find the right mix of tenants to pull them together than they did previously.
NREB: Are you finding it more difficult to get the deals done with the retailers?
Sciera: There is no question that deals are taking longer. More and more people are getting involved in them from the different levels on the retail side. Whereas previously, decisions may have been left to two or three people, now it seems six or eight people are getting involved. Retailers have looked positively upon Boston because it is — while certainly not unaffected — an insular marketplace that is diverse with the colleges, universities, and health fields.
Husid: The pace obviously picked up dramatically over the past few years, in terms of what the anticipation is and how quickly deals turned. On the landlord side, there is an acute sense that a deal in hand is a deal that has to be pushed very hard and very fast because you just don’t know if it’s going to be there in 2 weeks or a month from now. The pressure turns around once there is a handshake or an LOI. Some tenants are starting to take another look at some of the provisions. There are situations in which people are playing one location against another. Developers know about it far better than I do, but construction costs have just been escalating at such a rapid rate, and the crossover for what you need for rent to make these things work is moving at a pace that is inconsistent with what’s happening with the rest of the market. There is enormous pressure to get the deals that are out there done, and the new deals are going to take a while.
NREB: Are owners more willing to come down on rents in this market?
Husid: Not hardly, because the properties are all extraordinary opportunities.
Glazer: There’s no question that as the marketplace becomes more competitive, the rent structures become more difficult to maintain. Tenants are becoming much more aggressive in terms of wanting the landlord to increase its investment; therefore, tenant allowances have been skyrocketing. It’s another way that the tenant is trying to put more of the risk on the landlord and on the developer. And we see this in a number of different areas, in terms of the tenancies and the co-tenancies, which have always been a relatively important part of any leasing structure.
NREB: Ted [Chryssicas] what are you hearing from the tenant side?
Chryssicas: It is not about the next shopping center down the street; it is really about the center that is on the other side of the country or the one that’s in Nashville. Tenants will play that off of us as well, because they will only have, say, eight slots for 2009, and they will say, ‘Hurry up and make this deal, and we need it at these terms and conditions, otherwise this thing’s not going to get built in 2009. Maybe we’ll be back to you in 2010, but we can’t promise anything.’ People are looking and knocking on doors, but they’re not real players.
NREB: Is there a preferred property type here for new stores?
Anderson: Today, metropolitan deals are more exciting for retailers. The suburban deals have been pushed to the limit, and we’re going back and talking about all of the exciting projects along [Route] 128. Those are all still of great interest to all retailers because there’s still great density and inside 128 is still underserved by retailers.
NREB: Are current retailers coming back to you for rent relief? Is there an opportunity for retailers to take advantage of that?
Beckeman: We have several properties that have mom-and-pop tenants, so we have probably seen a few more of those calls. In the past year, we have lost three retailers out of 260, and that’s about a normal year. So it really hasn’t shown up in the numbers, however, looking down the pipe it looks a little scarier because some of the tenants are reluctant to open up a new shop in this kind of environment, and they are having trouble getting their bank line.
NREB: Are you trying to help out some of your good operators survive because you know that they’ll come back. Is it just a matter of working through this environment?
Wilder: Absolutely, and today you have to be a good operator. You have to have a strong tenant retention program, whether it is locals, regionals, or nationals because they need the help. Right now, part of our big thrust is maintaining occupancy levels, which might mean reworking a lease. Long-term, we are going to come through this, but there is gong to be a lot more fallout in 2009, and you need to be prepared for that. You need to be prepared to work with your tenants.
NREB: How do you see Boston compared to other markets you’re involved with?
Wilder: Boston is relatively strong because of the barriers to entry. We’ve seen that in a number of properties. We bought a portfolio last year that was a great portfolio of infill properties, and we’re still 96 percent leased today. We are not quite getting the rents we thought we could get, but we didn’t actually underwrite those higher rents. Lifestyle deals today are challenging. The pool of retailers has shrunk, and if you don’t get those main retailers, than forget it, I’m not opening.
NREB: How does CBL see this market?
Locke: The existing lifestyle tenants have opened up very well. One location in southwestern Connecticut is a terrific spot for these people to be. In other locations, though, in terms of the leasing environment, we have just seen the tide turn. Some retailers are utilizing their leverage and trying to push us to get projects started without signed documents. And that’s the ultimate push for a business when you need commitments in order to go forward. But the leasing world has just changed so tremendously. Three or 4 years ago, we were looking at three or four category-dominant-type retailers that we could turn to, and today, in most categories, we are looking at one tenant. It’s changed how you pursue them. In new developments, the rent relief situation in existing tenants is one thing, but as you’re working through a deal, the rent relief situation turns to push backs for them to improve their deal. So the urgency to get leases signed is just paramount. We’re under construction for a project outside of Pittsburgh, and half-leased on a 600,000-square-foot center with six or seven tenants, but it’s the remaining half of the space that is the real challenge, finding those remaining shop and box tenants who are going to be able to make the commitments.
NREB: What about on the acquisition side?
Koury: There are properties on the market. We’ve been fortunate to work with several sellers that have been pretty pragmatic when it comes to pricing. However, we have buyers and sellers coming together on pricing, but then the buyers can’t get the financing. We have to keep a positive attitude because there is some light at the end of the tunnel. We anticipate liquidity coming back on a couple of different levels after January 1st. Next year, insurance companies should hopefully re-allocate some financing and banks will probably offer some recourse. Costs will be a little higher and loan-to-values will certainly be lower, which may give somewhat of an edge to the institutions that can come up with 35 to 40 percent down.
NREB: One of the things we’re hearing around the country is that if you don’t have to sell right now, don’t. Wait until the pricing sort of falls out a little bit. Is this true here as well?
Weissman: The urban markets have still been pretty active — Newbury Street, Washington Street, etc. What’s really important is the underlying real estate. We are going to see some major fallout, and you have to look at consumer confidence on a macro level.
Beckeman: We have been in buy mode for the last 5 years, pretty consistently buying $40 to $70 million per year. We have already bought nine so far this year, and we are maintaining the pace to be in that range again this year. We have seen almost no movement in pricing to date for quality properties. But with B properties, there has been pretty big movement, at least in terms of what you’re willing to pay. Sellers aren’t quite there yet. They are just sitting and waiting for things to get better. Our focus has been on the urban areas. That’s kind of the last frontier for Boston in retailing, and we’ve put a lot of energy into buying in the city.
Locke: When sizing up a new development opportunity, buyers don’t realize the pressure that is put on the developer from rising construction costs, the tougher deals they have to make with tenants, and shrinking returns. It’s a wait-and-see game and for those that don’t have to sell, they’re going to wait it out, but not everybody’s in that situation. From the development perspective, with returns shrinking, that has to be an avenue that has to change for us.
NREB: Bill [Beckeman], what are you buying?
Beckeman: We buy mostly convenience-oriented shopping centers and pharmacy-anchored centers, smaller properties in the destination corridors, and we buy urban retail, however we can find it. We’ve been finding it in places such as the bases of buildings and condominium units. We thought we would have a catcher’s mitt on as the turmoil started to really materialize at the beginning of the year, and all we have seen is the real junk in the marketplace for about 3 or 4 months. In the last 6 months or so, there have been a few deals that would come out, but we have bought mostly off-market.
NREB: Jason [Weissman], you mentioned you’re doing some work downtown?
Weissman: Yes, we are. Last year, at the same time period, you would probably have had 15 to 20 property trades. Those who don’t need to sell aren’t going to market. Property owners that are in trouble in other areas will have to potentially dispose of assets in the core markets, so that’s probably where there is going to be opportunity. Secondarily, those same owners, who own in core markets, may look to go to market if there is a spectacular opportunity in other areas. And we are actually seeing that right now. We are working with a group that may go to market with a multifamily portfolio because there is a great retail opportunity in another market in another part of the country. In Boston, we didn’t really experience the irrational exuberance that was seen in other markets.
Roberts: If you look at things from a somewhat positive, the-glass-is-half-full aspect, there is going to be a lot of opportunities. There is going to be a flight to quality from retailers because of the lack of product and not the fact that they want to open up stores. You can’t say, across the board, that every retailer doesn’t want to do deals. There are several who might have scaled back, but it is more of a function of how much opportunity they want to pursue.
Anderson: Retailers absolutely recognize the strength of Boston and the Northeast. They have faith that these stores will do well. They may scale back their projections to a more conservative number, but they still believe in their minds that there’s great upside to these locations.
Stratouly: We have a relatively small market that is characterized by fairly limited population growth, but our demographics are different from other states.
Sciera: There’s an underlying conservative nature here that will probably serve us well through this period. You hear about so many developers with billions of dollars of debt coming due. We have a company that has more than 80 properties, and we have one loan coming due in the next 5 years. There’s a conservative thread through New England.
Koury: Firms that need to diversify their real estate portfolio want to have a segment of it invested in retail. However, as we enter or continue this recession, retail is certainly going to get, as a perceived investment vehicle, hammered over the head, based on all of the points we brought up here today, on a national basis. You are going to see these effects happen on even a broader scale in the Midwest and parts of the Southeast, but for those who want to diversify into retail, people will look at the Northeast as somewhat of a safe haven.
NREB: Michael [Sleece], what is stance from your banks?
Sleece: Up until the bailout plan, banks were trying to unlock their capital. You literally could have come to us with a cash-secured loan request and we would have had to say no for capital preservation reasons. But assuming you are in the business and you are going forward, the underwriting has changed. We now look very closely at co-tenancy provisions. Debt-service coverage ratios that typically would be underwritten at 1.20, 30-year amortization and a 7 percent interest rate are now are now 1.25, 25-year amortization and a 7.5 percent interest rate. Now you’re putting in 35 percent equity realistically, at least, which is going to have to drive values down and cap rates up. It just has to, because to get your return you have to put so much more equity into deals. A 200 basis-point rise in cap rates is going to be very real, regardless of the quality of the property. A year ago, centers were trading at low 5.25 and now it’s going to be 7.25. And we will see some that are going to go from 8 to starting at 10. We have lost the conduits and life companies are, at best, limited to 65 percent, so how do you get taken out? There’s just a lot more equity in the projects.
Koury: In 2002, the best supermarket-anchored shopping centers were selling at 9 percent caps. We do valuations for owners that take their properties to market, and right now we’re looking at supermarket-anchored centers selling in the 7.5 to 7.75 cap range, depending on where the loan constants are, because ultimately the buyers are looking at their leveraged returns. In the past 3 years, they could have gotten as low as a 5.75 or 5.8 cap, 6.5, certainly 7 cap on the property. Now they can only sell it for 7.5 or 8. So it’s all gloom and doom because these things are selling at 8 caps now, but on a historical level, that’s still an aggressive cap rate.
NREB: Switching gears, I want to talk about the retail market. Putting aside your feelings about whether they last or not in this type of climate, are there retailers that are entering the market with multiple stores or are in the market and looking for more stores?
Sciera: Retailers are looking at the entire country, so we are not just competing against New England opportunities; we are competing against other markets in the country. It depends on the strength of the real estate. There are a lot of good retailers that are expanding into Boston. Apple is expanding into Boston; it’s probably one of the hottest retailers in the country right now. Urban brands, such as Anthropologie, are expanding into Boston. That’s the specialty side of it, which I focus on. There’s a lot of appetite.
Roberts: You have the J. Crews of the world that are still performing well and are under-penetrated. We’ve even done deals with people who are saying they aren’t doing deals, such as Gap Inc. A retailer may have a strategy that says it’s about repositioning and right-sizing, but a lot of that means repositioning and right-sizing from where they are, which may no longer be the right spot, to where they think they should be. There’s still activity with the quality players.
NREB: What about developments?
Stratouly: In Wayland, we have 165,000 square feet of lifestlye space that is grocery-anchored by Stop & Shop, and 100 units of housing. We’re now into our third year with permitting just plugging away at barriers to entry. If you look at the demographics of Wayland, it’s as good of a community as you can find anywhere in the country, and I don’t think anyone here would suggest that it’s over-retailed by any stretch. We have had three different grocery store deals, we have had three different drug store deals, we have had three health clubs, and we have had women’s specialty stores — all with letters of intent. They are about to sign and the next thing you know, they’ve moved into financial stresses or put the lease on hold and said yes, but are waiting. Or you have lost to Cincinnati. And suddenly, we go from our myopic view of us being the center of the universe to some guy sitting in a boardroom in Minneapolis saying, ‘Why would I invest in Boston for an 8 percent return, when I could invest in Toledo, or Tulsa or Dallas and get 14 percent.’ Suddenly you’re competing on a national basis again. So it’s been frustrating, but we have our last conservation commission hearing tonight. If we get through that relatively unscathed, in Wayland anything could happen, we should start demolition of the building. Financing is ready to go at about a 40 percent equity ratio, maybe 35 percent.
We have a project that we started 2 years ago in Sharon that is 450,000 square feet and anchored by a very large Midwestern retailer. The deal we had a year ago is quite different from the deal we have today. That particular retailer shut everything down, took a timeout and came back. We did what we had to do to get the deal. And now we’re chasing the grocer, and it’s the same story: get close with the grocer and next thing you know, your demographics change. So lots of activity; lots of talk; a great amount of caution in signing. We are cautious about them, they are cautious about us, and they are cautious about their own business. So it’s going to take much longer than anybody thought.
Sciera: We have Legacy Place under construction, which is probably our most visible project. At this moment, I would say about 95 percent leased. We’re planning to open August 2009. We were fortunate to get a lot of our leases done ahead of this curve that we’re in. We are cautious about executing and getting the project open. It has great anchors, great restaurants and great specialty stores, so we are really excited about that. We also have one on the North Shore and in Lynnfield. Both Legacy and Lynnfield have Whole Foods Markets in them. We had a lot of discussion about grocery stores and we’re happy to have them as a tenant. We have some work to do at both, but at the same time, we are grinding out deals one at a time. It’s a momentum thing, and we’ll get there. Overall, it’s really going well.
We opened two projects this year in Mansfield and Wareham, which are more hybrids. Mansfield is 475,000 square feet and Wareham is 650,000 square feet. A lot of boxes, as well as specialty components and restaurants. Both of those projects have come on the block and they’re both doing very well. We’re doing a project in Cheshire too.
Locke: In the New England area we’re finishing up our Milford project. Beyond that, we have a 600,000-square-foot project that started as a lifestyle center, but we are converting about a third of the project to more of a box-type of layout that reflects the demand today from those boxes that are still out there, versus tenants like Coldwater Creek, who are not as active. And we’re finishing up Phase II of a project in North Carolina. In terms of New England, though, we have not been as active lately, but we have about 1.5 million square feet elsewhere.
Roberts: We are very actively involved across the bridge at Seaport Square, which is currently going through the permitting process. Ultimately, it will have 6.5 million square feet split in thirds between office, residential and retail. That’s with Morgan Stanley and Gale International. In the long run, once that gets built out and we get it finally permitted and it takes shape, it’s going to be a very dynamic project. I don’t think there’s a tenant that we’ve talked to who hasn’t shown a great deal of interest in that section of the city, and there’s a number of retailers and restaurants that will do well over there with a little bit of infrastructure. We just keep adding office buildings, a convention center, which at the moment is still top 10 in the country and looking to add 300,000 square feet. Long-term, there are great prospects for growth.
NREB: As you lease your properties, you obviously have your eye on specific retailers. As some of these retailers disappear, are you perhaps lowering your standards a little bit as far as what kind of retailer you will put in, versus what you wanted to put in initially?
Sciera: It depends on the property and it depends on the underlying real estate. You change directions all of the time. That’s the nature and the core of our business. The one certainty that we can all count on is change. So there is a direction change a couple of times in a day, in a week or in a month. I wouldn’t call it a lowering of standards; I would call it a change of direction. If we were doing X, Y and Z tenant in one project, we may do another set and think it’s just as good; it’s just a different direction. You have to focus on your market and the customer that you are going after in that market. Who are the hundred tenants in the 70 spots that you are going to fill who answer the call in that market. Absolutely, it will swing wildly and be all over the place, but there’s still a bunch of tenants that you want to go after and secure, who cater to that customer you are going after.
Roberts: Depending on the project that we are closing, we have maintained that we are developing a holding company. For the past 5 years, and maybe a little bit longer, there’s been a lot of players who develop and flip, either before it’s built or right after it’s built. And it’s really about how much of a bottom line can I generate. And It may not be the best thing for the guy who’s going to buy it or the tenants that are in place, based on what the center’s going to look like and the quality. Our goal is to build great projects that are leased well. So something like Legacy Place, which has some of the best tenants in the marketplace, we are not going to compromise. We might hold those last two spaces for the right tenants. Other ones, we might modify them slightly. If you are to maintain and deliver what you said you were going to deliver, it’s not about filling space, it’s about the quality of the tenant that fills it.
Wilder: With some centers you have an A merchandising plan and you have a B plan. I think we’re seeing more and more often that you have to go to the B plan. And I don’t think there’s anything wrong with that. You can design the kind of flexibility into a center so that you can still pitch your A plan because the design accommodates that, but if you don’t get the A retailers, you still have a B plan. It’s still credit. Maybe the rents aren’t quite as high, but again, you can fill it, it can be occupied and it can generate cash flow. We are doing an 825,000-square-foot center in Northborough that is a mix of junior boxes and it also has a lifestyle component. It’s a 2010 project, and I’m happy about that. We are not in a great rush to lease the lifestyle part because everybody is out there looking right now. Lock in your anchor stores, the market will turn, and by 2010 there will be an opportunity to really do a great job at merchandising that kind of center. Again, we have an A plan and a B plan, and we have to be prepared to execute the B plan.
©2009 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 554-6054.
|
