COVER STORY, JULY 2008

NEW ENGLAND RETAIL REPORT
Strong fundamentals keep things rolling in New England.
Stephanie Mayhew

The New England retail marketplace continues to be a steadfast environment for retailers, despite the current market squeeze. Chuck Irving, the director of KGI Properties, which has approximately 5 million square feet of retail property throughout New England, says, “The good thing about New England is that there is less retail space on a per capita basis than any other part of the country, so it has always been a healthy retail market.” He adds, “I don’t expect to see any major vacancy issues, but I do expect to see a slowdown in the development sector of the retail economy.”

This slowdown is being felt in the big-box sector, as developers decrease construction of big-box projects such as Wal-Mart, Lowe’s and Home Depot. “It is a healthy decision in relation to where the economy is right now,” Irving explains. “These companies have not stopped growing, they are just moving forward more cautiously this year.”

On the other hand, supermarket retailers are still charging forward. “From Wegman’s to Fresh Market, there is a new spectrum of players in the supermarket business, which is prompting innovation among those already established in the market such as Stop and Shop,” notes Irving.

There are many projects going forward with smaller supermarkets that are piercing higher end communities that they have not been able to penetrate before. These supermarket retailers are doing that by literally downsizing stores and being more creative with prototypes. “Since these supermarket retailers have already paid for the ad dollars in the market and they have the distribution capacity in place, there is no reason not to expand their stores in the areas even if they have to downsize,” explains Irving.

Aside from supermarkets, lifestyle centers continue to be the premier retail development trend in New England. “Banks are very willing to finance them and tenants are interested in being a part of them,” says Irving. “Tenants just seem to be prefer upscale outdoor centers to upscale malls and the sales volume at the stores in these lifestyle centers demonstrates that.”

The surge of lifestyle centers has also changed the type of projects KGI has historically been known for — big-box projects such as Wal-Mart and regional power centers. However two of their newest projects are quite a departure from that format. According to Irving, the shift in development for KGI was in correlation with the current demand in the marketplace. “KGI’s projects were being driven more by supermarkets than by the big boxes. And since we finance our projects off of them, we go where they want to go,” he says.

In Lyme, Connecticut, KGI, along with joint venture partner Konover Development, is developing Gateway Commons, a 400,000-square-foot lifestyle center. The project will include one large format store of more than 100,000 square feet, a supermarket and approximately 85,000 square feet of small shops and restaurants. The project is currently in the process of permitting, with an anticipated groundbreaking in 2009 and completion most likely in 2010. “Lyme is one of those markets that has a high income demographic market, and despite the economy, retailers are still very interested in becoming part of this project,” remarks Irving.

Wayland Town Center in Wayland, Massachusetts, exemplifies the shift in retail design in New England.

KGI is also set to break ground in August on Wayland Town Center, a high-end, mixed-use project that will feature retail, office and civic space, as well as approximately 100 condominium units. Situated between Wellsley and West End in Wayland, Massachusetts, the project will offer 205,000 square feet of leaseable space. “Upscale projects like Wayland and Lyme are unique for us, but they are simply reflective of the communities we are putting them in,” explains Irving.

Leasing activity has slowed somewhat, depending on the type of project and its location. “In the upper end categories, leasing is still strong, but leasing in some strip centers has become more difficult,” notes Irving. “It is just a slow time right now.”

Over the past 3 years, a great deal of retail development was completed in markets such as Maine and New Hampshire. Southern Maine has been especially busy with about a million square feet of retail development either permitted or under construction, according to Mark Malone, vice president of Malone Commercial Brokers. “It has actually been busy in the past year considering the current economy,” he says. “For a market our size, that is a good addition to the market.”

Much of the new development within Southern Maine has been small lifestyle centers within more suburban areas. “Traditionally in Southern Maine, the Maine Mall, which has drawn from as much as 50 to 75 miles out, has always been the hub of retail. But most of the growth is happening in outlying areas such as Biddeford, Augusta, Lewiston and Auburn, which have started to add more retail,” says Malone. “Developers are now going out to those markets that would have come to the mall for their shopping. They are opening up Target stores and Super Wal-Marts, Lowe’s, Home Depot, and Bed Bath & Beyond.”

KGI is currently developing two power oriented centers in Maine. In Scarborough, just south of the Maine Mall, the development firm is in the process of constructing Scarborough Gallery. A Lowe’s is open at the 650,000-square-foot center and a Wal-Mart is currently under construction. In Sanford, KGI also recently held a groundbreaking for a new Wal-Mart.

In addition, some retail opportunities are popping up north of Portland. Cedarwood Development is currently planning a 319,166-square-foot lifestyle center set on 35 acres 4 miles from the city of Portland. Development is slated to begin spring 2010, with a store openings set for spring 2011.

As construction costs go up and barriers to entry become even tougher, Malone believes that development activity will begin to center more on the reuse of older retail centers. “Developers and some REITs are buying up older centers, putting a new finish on them and bringing them back to life,” notes Malone. “Maine has just passed some new vernal pool laws that are very restrictive on what can be built around wetlands, so there will probably be more and more of this type of retail development. ”

Despite recent growth, Malone believes retail development will begin to slow down. “I think we will mostly see infill development and the absorption of the spaces in projects that are already online or permitted.” Irving concurs, adding, “There are not enough demographics to support building new stores as rapidly as we have been in the past. The retail development in Maine has been mainly large discount stores such as Wal-Mart, Home Depot, Lowe’s, Kohl’s, and those retailers are now focusing on much denser demographic areas in the near-term.”

Leasing activity within Maine and its more popular Southern Maine submarkets has slowed, but, vacancies are still rather healthy. “In the past 10 years, the vacancy rate in this market has not gone over 2.5 percent, but in the past year, the vacancy rate has risen to 5.6 percent, more than doubling,” notes Malone. “Now building owners are offering more incentives such as free rent and discounted rates.” Depending on the location and the type of center, rental rates range from $15 to $25 per square foot. “Many of the new projects are suffering a little bit on infill space. It is just not being leased up as quickly because landlords are holding their prices in the mid $20s and the market is just not there for it,” explains Malone. “It is also a combination of tenants being cautious because of the economy and supply increasing to the point beyond what the population has grown.” For example, retail sales in the Maine Mall area in the past 5 years have gone up about 1 percent per year, but the supply of retail space has gone up more than 20 percent in that same period.

Investors continue to be keen on retail properties within Maine. “The sales that have happened have been very quiet and under the radar. Cap rates on local multi-tenanted properties with varying lease terms from 2 to 10 years are around 7.5 to 8 percent,” says Malone. In the future Malone believes that more large corporations and REITs will continue to come into the market to buy up some of the older centers. “The private money, the local developer and the local investors are having a harder time with banks tightening credit, so more big developers will come in and re-use space,” Malone explains.

Overall, the Maine retail sector will hold fairly steady. “The market is price sensitive and smart developers will fill their spaces at the rates that are going today,” remarks Malone. “Some developers are going to hold onto their mid-$20 prices, but because the infill is coming from local and regional tenants, the competition is just too great to get those kind of higher prices right now.”

The Boston retail market is another integral component to the overall success of the New England retail market. According to Pat Paladino of Colliers Meredith & Grew, retail development has been aggressive in the Boston area. “There is more development being planned, permitted and developed in this market than I have seen in quite some time,” he remarks. “There are several lifestyle centers underway, so in a sense, Boston is just now catching up to other parts of the country in terms of the lifestyle trend. Much of this lag has to do with this market being an older market without much developable land. To get anything done or permitted of any size or scope takes a long time to get approved and constructed.”

There are more than 9 million square feet of retail projects in suburban Boston that are either permitted or are planned to be built in the next 3 years, and although the question of whether they will all be built remains unanswered, Boston is proving to be a popular market for retailers. “As a whole, Boston has been under retailed both from the amount of retail space and the quality,” says Paladino. “Also, Boston is obviously an older area with little available land and the existing product is older, so Boston is just now starting to catch up with the rest of country to have the quality of retail that this highly educated and high-income consumer demographic requires. It is a place that many retailers want to be.”

Like so many of the other markets within New England, a good deal of the planned and current retail development in Boston is taking place in the suburbs, although growth has been more project specific. Developers are scouting for holes within underserved markets that have good demographics and locations.

In Dedham, Massachusetts, W/S Development, and joint venture partner National Amusements, are currently developing Legacy Place. The 675,000-square-foot lifestyle center will feature a 60,000-square-foot Whole Foods Market, and a 16-screen, 91,000-square-foot cinema de LUX. Other tenants include L.L. Bean, Anthropologie, Urban Outfitters, Legal Seafoods, P.F. Chang’s and Ruth’s Chris Steakhouse. The center is slated for a summer 2009 opening.

Along the front of Gillete Stadium in Foxborough, Massachusetts, The Kraft Group is developing Patriot Place, the largest mixed-use retail and entertainment destination in New England. The 1.3-million-square-foot lifestyle center will feature large and boutique retailers, a state-of-the-art movie theatre, restaurants and other nightlife options, a live music venue, a four-star hotel, a medical and wellness center and the New England Patriots Hall of Fame and Museum. The first phase of the project is open and the second phase is nearing completion. The center also features New England’s first Bass Pro Shops. Also a first for New England, the largest Apple Store in the U.S. just opened in the Back Bay area of Boston in May.

Grocery stores are in demand in the Boston retail market as well. Grocery stores such as Whole Foods Market continue to grow in the marketplace, many of which are part of new lifestyle centers. “There are many top retailers that are currently in the market, but they have not had the opportunity to expand, and now these retailers are comfortable going into some of the new, upscale centers,” remarks Paladino. Entertainment components such as high-end, theaters, bowling alleys and themed bars and restaurants are also being incorporated into more mixed-use projects and lifestyle centers throughout the Boston area.

In the future, more development will likely be seen in the more urban areas of Boston. The seaport area just outside downtown Boston has roughly 13 million square feet of development in the permitting process or already permitted, much of which is retail.

Although national tenants continue to expand in the Boston area, Paladino notes that retail leasing is noticeably slower this year. “Retailers are slowing down, pulling back or rethinking what they do. The good thing about Boston is that it is not over-built for retail. If retailers have to choose where they are going to expand, Boston will still be high on the list because of the demographics here,” he explains. “From a pure activity standpoint — the good projects still have plenty of demand, but marginal product and older space are taking longer to fill.”

The future of the Boston retail market is expected to remain solid. “Retailers will continue to scope out quality projects,” says Paladino. “As supply remains tight, activity should not slow down anymore and hopefully there will be stabilization and improvement over the next year.”

Overall, high barriers to entry, fewer product opportunities, and good demographics make New England an ideal place for retailers. As retail vacancies increase in other parts of the country, all of our experts agree that New England should hold steady, insulated from outside circumstances. “The retail market always goes through cycles and New England has historically been the least affected of any area in the country and that is my prediction again,” says Irving.

Cabela’s Opens in Scarbrough, Maine Cabela’s in Scarbrough, Maine. Photo by Tim Frecehtte Cabela’s, a hunting, fishing and outdoor gear store, recently opened the doors of its first Maine store in Scarborough. The 125,000-square-foot, large-format superstore is located on the Haigis Parkway at Exit 42 of the Maine Turnpike. The new store was constructed in Cabela’s trademark style, which showcases the outdoors in an indoor environment. The Scarborough store will feature a 10,700-gallon aquarium with freshwater fish native to Maine, Cabela’s trademark Conservation Mountain, and hundreds of animals in museum quality dioramas. Additional features include a laser shooting gallery, a gun library, a restaurant, a general store, a fly fishing shop, a bargain cave and a gift shop. The store is expected to create approximately 250 jobs and bring in millions of visitors annually. — Stephanie Mayhew

Fan Pier Mixed-Use Development Underway Fan Pier The Fallon Company is currently developing one of Boston’s most exciting mixed-use developments, Fan Pier. Spanning nine city blocks along the waterfront, the project will include more than 3 million square feet of Class A office space, luxury residences, a boutique hotel and spa, a 6-acre marina with a public transportation dock, restaurants and upscale retail shops. Situated on Boston’s picturesque harbor, the 21-acre project will encompass more than 200,000 square feet of high-end retail and restaurants. The Fallon Company currently plans to incorporate the retail component in the first floor of each building throughout the project. “There is no better place to live, work or play than Fan Pier in the city of Boston,” notes Joseph F. Fallon, developer of Fan Pier. “Any restaurateur or retailer who finds themselves operating at Fan Pier will benefit from that lifestyle.” Fan Pier is also the new home of the Institute of Contemporary Art, as well as acres of public parks and open space that includes a Public Green, a Waterfront Park and a continuous HarborWalk along the water’s edge. One Marina Park Drive, a 500,000-square-foot LEED-certified office building, is now under construction and set for completion in 2010. The Class A office building is slated to include first-class restaurants on the first floor. Elkus Manfredi Architects designed the master plan for the mixed-use project and Turner Construction Company is heading up the construction efforts. CBRE is the exclusive leasing agent. — Stephanie Mayhew

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