COVER STORY, JULY 2009

NEW ENGLAND RETAIL
New England retail relies on strong fundamentals.
By Stephanie Mayhew Specht

The current recession has hit retailers hard, and markets across the country are seeing vacancies inch higher, concessions increase and rental rates decrease. While the New England retail market is feeling some effects in its retail sector from the current recession, it is still holding up fairly well due to factors such as high barriers to entry, which have led to a lack of oversupply, and low vacancy rates before the market took a tumble.

Northeast Real Estate Business sat down with Bob Sheehan, vice president of Research for KeyPoint Partners; Gregory W. Boulos, a partner of CBRE|The Boulos Company; and Jody Skaff and Lisa Kane of the Kane Company, to get their perspectives on the current retail market. 

Vacancy on the Rise

Overall, demand for retail space in the New England market has slowed in the past year as national retailers have scaled back or stopped expanding all together, which as Boulos points out is symptomatic of the drop in consumer spending.

And much like the rest of the country, these closings have left holes in the New England market. According to KeyPoint Partners latest Eastern Massachusetts retail report, 13 retailers, eight of which are no longer in operation, lost at least 10 locations. These include Mattress Discounters, Corners, Linens ‘n Things, Circuit City, MassBank, KB Toy, Limited Too, and Tweeter. It should be noted that all 14 Limited Too locations were replaced with Justice stores.

Retailers that declined by at least 20 stores were Mattress Discounters, Blockbuster, and Curves. Linens ‘n Things and Circuit City vacated 607,000 and 498,000 square feet,  respectively, during the study period. The report indicates that the level of vacant square footage in Eastern Massachusetts increased 23.9 percent, incrementally equating to more than 3 million square feet and 1,000 more units of unoccupied space. The net result leaves 15.6 million square feet and 5,400 retail units vacant in the region.

Out of that region, Boston has the highest vacancy rates according to the report, sitting at 10.3 percent. However, it is noted that when measuring Downtown Boston’s vacancy rate, the rate is closer to 8.7 percent. The report indicates that Buzzards Bay and the Inner Suburbs, suburbs of Boston, exhibited the largest jumps in vacancy rates — increases of 59 percent (5.9 percent to 9.4 percent) and 41 percent (5.6 percent to 7.9 percent), respectively. Sheehan notes that this was due to a higher percentage of home foreclosures and/or higher unemployment.

On the other hand, a few retailers are still taking space. According to the report, Sleepy’s Mattress added 13 stores, Chipotle Mexican Grill opened 11 new restaurants and CVS came in with nine new locations. Sheehan does note, however, that Sleepy’s may have been a bit too aggressive in their expansion plans and are now making blanket requests for rent relief in order to ensure that their stores remain profitable.

Lowes was the largest contributor to the market’s retail inventory, adding 274,000 square feet with two new home improvement stores. Sheehan also notes that Planet Fitness is making headway in the Eastern Massachusetts market. The franchise retailer added roughly 187,000 square feet to the region, and notably it only takes second generation, a boon to any market right now.

However, Sheehan says, “While there are deals getting done, it is not keeping pace with the amount of space becoming vacant.”

To combat rising vacancies, landlords are rolling out lower rental rates and concessions to retain existing tenants and lure in new retailers.

“I think landlords are getting more realistic with rental rates,” says Skaff.

In the Portsmouth area Skaff, who focuses primarily on Southeastern, New Hampshire, notes that rental rates were in the $25 to $30 per square foot range for a 5,000-square-foot store, but that number is now dropping, especially for larger stores, to the teens and lower teens, and upper teens. Kane, who works in the Salem, New Hampshire market, notes that she is seeing the same trend.

“I am seeing lease rates in the mid teens having come down from the $20s,” she says. “But there is a lot of vacancy in the Salem market.”

Although Salem is feeling the pinch, Kane and Skaff believe a recent ruling in Massachusetts could help offset the downturn. A major perk for shoppers in New Hampshire is the fact that the state does not have a sales tax.  Always a lure for shoppers along the border as well, a recent vote to hike the sales tax from 5 percent to 6.25 percent in Massachusetts should only continue to bolster sales in New Hampshire as more New Englanders make the trek across the border.

Concessions Increase

Hand in hand with rising vacancies and decreasing rental rates is an increase in concession from landlords. Boulos remarks that landlords are willing to be creative in how they put together deals with retailers, and he is advising his owners to do just that.

“We are advising our clients that own retail properties to do what they can within reason to keep tenants in place and to ride out the current storm,” he explains. “Now is not the time to be doubling a tenant’s rent.”

Kane notes that just about all of the deals that she is working on are offering some type of incentive for the tenant. 

“The more experienced the landlord, the more willing they are to be creative and flexible in getting the tenant into their centers,” says Skaff.

Sheehan, however is seeing a slightly different attitude with his firm’s clients.

“Regarding rent relief, with our own properties, there have been some concessions but for the most part our clients, mostly institutional, are kind of digging in a little bit,” he says. “While they might offer temporary relief, I don’t think any of our clients have agreed to permanent relief.”

However, he does note that if you move outside the Boston market, landlords may be a little more amenable on looser terms for rent relief.  Overall, the lack of available development space has kept Boston relatively in balance and the concession in check.

Construction Halts/Slows

As demand weakens and financing dries up so does new construction. Sheehan believes that developers in his region will have their hands strapped for the next couple of years due to all of the excess space on the market. Many development projects have been put on hold and it is unknown when they might come back to life because they will then have to compete with a fair amount of vacant space. 

“There is going to be cheaper real estate for second generation space as far as retailers looking for expansion opportunities. They don’t have to pay the higher rents that a new development would command,” Sheehan says. “There may be opportunities 12 months down the road that were not available 12 months ago.”

In the Greater Portland area of Southern Maine, Boulos notes that development has, for the most part, come to a standstill.

However, in New Hampshire, Skaff and Kane have stayed busy as developers push on with new projects.

Skaff is working on two new projects from the Wilder Companies — Portsmouth Crossing and Rochester Crossing. Still in the early stages of construction, Portsmouth Crossing will feature approximately 400,000 square feet of retail space and a hotel.  Home Depot and Eastern Mountain Sports have already singed on for space at the center. Situated with excellent visibility fronting the Spaulding Turnpike, just off I-95, with direct access from Woodbury Road, Skaff notes that the favorable location will serve not only area residents, but commuter traffic, vacationers and shoppers coming from Maine and Massachusetts to take advantage of the absence of a sales tax.

Rochester Crossing is located in Rochester, New Hampshire, in Stratford County, the fastest growing county in the state. The recently completed center includes tenants such as Kohl’s, Lowe’s, Fashion Bug, maurices, Famous Footwear, Game Stop, Sally Beauty Supply and Aspen Dental. Skaff and Kane are also currently working to secure a 7,000-square-foot restaurant.

On Route 125 in Epping, New Hampshire, Epping Village is underway. The new center is  situated midway between Manchester and New Hampshire’s Seacoast immediately off of Route 101. The site features a parcel of land to build an 80,000-square-foot store, 10,000 square feet of inline retail, plus a 4,400-square-foot pad site. The site also features an existing Walgreens drug store.

Kane is working on leasing up a new retail center that was recently completed on Route 111 in Hampstead, New Hampshire, Hampstead Village. Despite the current economy, Kane notes that the center has been leasing up quickly. Approximately 21,000 square feet has been leased up and only about 5,000 square feet remains.

“The fact that development is still going on says a lot about the optimism, growth, strength and vitality of this region,” remarks Skaff. “We are uniquely situated between the Massachusetts and Maine borders and not too far from the Canadian border so we can maximize the consumer spending from all of the shoppers.”

Silver Lining

Despite the obvious negatives, if one can look for a silver lining, it might be that this era of recession has ushered in a new wave of entreprenuership as local retailers take advantage of lower rents and unheard of concessions.

“The back filling is not so much from other national companies, that is pretty much on hold, but from local companies,” says Boulos. “Some local established retailers are coming in and looking at the vacancies and either trying to buy or lease the buildings.”

According to Boulos, local banks have been active as well as restaurant retailers. Sebago Brewing Company recently purchased land and built a new restaurant, and Sea Dog Brewing Company recently closed a lease on a new location. In Eastern Massachusetts, Sheehan notes that local banks, such as Eastern Bank are still active as well.

“This is a great opportunity for local and regional tenants to expand, begin new businesses and roll out additional locations,” says Skaff. “In the past, landlords might not have been quite as interested in looking at these smaller entities and now they are more willing to do so.”

However, the question on everyone’s mind is when will the national retailers start to make a move again? Sheehan believes that it depends a lot on what they see in the coming months.

“Typically in past recessions, retailers put their expansion plans on hold.  Before they start to grow again, they have to see significant duration of stability within the existing portfolio,” he explains.

As stability returns Sheehan notes that the retailers that have been recessionary proof to some extent — the value oriented retailers, supermarkets and wholesale clubs — may start to get  more aggressive in terms of store expansion, looking at more deals in the latter part of this year and spring of next year.

Skaff feels very bullish on her region and the New England retail market. Although much activity came to a halt in the fourth quarter, she believes that the dust has settled and retailers are going to start moving forward again.

“I do feel very positive about this region in particular and I feel positive about retail coming back strong in the next couple of years,” she says.

As retailers review their options, Boulos believes that the markets and submarkets that were strong before the recession will remain strong in the Maine region, especially the two main retail markets in Southern Maine — the Maine Mall area and downtown Freeport, Maine.

“The best locations will continue to be the best locations,” he says. “There will be some backfilling needed for some of the vacancies in the area and that will take a little bit of time, but these markets are not overbuilt so there will not be an oversupply to contend with when the market comes back.”

Gloucester Crossing Brings Retail to Cape Ann Gloucester Crossing in Gloucester, Massachusetts. While many projects have stalled due to the economy, there are still some projects that are defying the current climate and succeeding. In Gloucester, Massachusetts, Sam Park & Co. is currently constructing the first phase of Gloucester Crossing, a new $60 million mixed-use development. The 33-acre project will feature a 200,000+ square-foot open-air retail center, a 96-room Holiday Inn Express and 100 units of assisted living housing. Sam Park, the owner and developer of Gloucester Crossing, explains that he chose to develop at this particular location because of the demographics in the area. Unlike so many other markets and submarkets in New England, the retail sector in this particular trade area is under supplied. According to the demographic studies done by Park & Co., the new center will fill a much needed void in a growing market. The closest significant shopping areas are, at minimum, 15 miles away in Beverly, Danvers and Peabody, Massachusetts. “We approached the development of this project with a lot of knowledge about the demographics and the needs of the surrounding area,” explains Park. “It is definitely a place that can support the retail. Even in an environment in which no one else is building we are able to get our project built because the fundamentals work.” Gloucester Crossing Gloucester Crossing is located directly off Route 128 at Blackburn Circle in Gloucester with excellent access, visibility, parking, and signage. The project will serve the Cape Ann and North Shore communities including Gloucester, Rockport, Riverview, Riverdale, Annisquam, Essex, Ipswich, Hamilton, Wenham, Manchester-by-the-Sea, Prides Crossing, Magnolia, Beverly Farms, the northern portion of Beverly, Massachusetts and more. More than 35,000 cars pass the location on Route 128 daily, and there are more than 150,000 people living in the defined trade area. In addition, the community swells to almost twice its population during the summer months. The retail component will be anchored by a 60,000-square-foot Market Basket and a Marshalls, and will also feature several small shop specialty retailers and convenient services. In addition, the center is slated to contain several restaurants ranging from fast casual to higher-end style restaurants. Five Guys Burgers and Fries recently signed on at the center. “The hardest part of retail leasing today is just getting over the inertia in which everyone thinks every community is the same,” explains Park. “As retailers have had the opportunity to look at the demographics they have come to the conclusion that Gloucester is a great place to enter and expand.”  The Wilder Companies is the exclusive leasing agent for the retail portion of the project and will oversee the management of the property once construction is complete as well. “The Wilder Companies has always been creative and has helped us work through any  difficult issues we have had getting all of the retail and other amenities to work together,” says Park. “They have been very instrumental in getting the whole style of the center to really work cohesively.” The hotel component will be especially unique. Taking cues from dense urban mixed-use projects, the Holiday Inn Express will be fully integrated into the retail component with ground floor retail that will tie into the other shops.  “It is exciting because it is different from the conventional hotels that have been built. It helps round out our retail center by adding some additional retail,” says Park. The new Holiday Inn Express will be the first hotel built in the Cape Ann area in roughly 20 years. Park notes that studies they completed indicated that thousands of room nights were being shipped out more than 20 miles away. And that was just from business travelers. The entire project has been designed to blend in with the architecture that has made the New England town a favorite destination. Park calls it a harbor feel. The 33-acre property was acquired in December 2004, and the development process began shortly thereafter. The financing package includes a TIF with the city of Gloucester, and to help create local jobs and offset infrastructure costs, the project was proudly awarded a $2 million MORE (Massachusetts Opportunity Relocation and Expansion) grant. The grand opening of the retail component is scheduled for September, and work is scheduled to begin on the hotel foundation this fall with vertical construction beginning next spring. Park expects that the entire project will be completed fall 2010. — Stephanie M. Specht

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