MARKET HIGHLIGHT, JUNE/JULY 2010

NEW ENGLAND

New England Retail Market

“Proceed with caution” is the theme for active retailers and restaurants that are looking to take advantage of the current economic climate. While many retailers and restaurants remain on the sidelines, some are doing deals — including a crop of new concepts looking to enter the New England region as well as a few well-known ones that have been able to hold their own during the current down economy.

Eager to fill vacant space, landlords realize it is a tenant’s market and are cutting deals they would not have considered in better times. The great thing about the retail sector is that there continues to be a cast of true entrepreneurs that believe they have the goods and services which consumers want even in this environment.

Here is a rundown on who is doing deals. Panera Bread has an aggressive but smart expansion program in place. As a result of the success of its drive-thru prototype, the company is looking at real estate opportunities they had not in the past. Pizzeria Uno Corporation is introducing its new express concept, UNO Dué Go. Also active are Chipotle, Five Guys Burgers and Fries, Friendly’s Express and McDonald’s. In the grocery category, Stop & Shop continues to be the dominant player in most of New England and recently acquired several Shaw’s units in Connecticut. Market Basket is in expansion mode and has had initial success with its 100,000-square-foot prototype. ALDI has developed a niche for itself and has opened several units with more in the pipeline. Also, Price Rite/Shop Rite is looking to have more of a footprint in the region and will make a very competitive industry even more so. Landlords who were not interested in Big Lots or Dollar Tree in the past are now looking at these retailers, which can take large chucks of space, very differently. Dollar General is active in Vermont. Advance Auto and Auto Zone are doing very well and look to do many more deals. Other retailers doing deals — though not in large numbers — include Verizon, T-Mobile, For Eyes Optical, The Vitamin Shoppe, Firestone, Tractor Supply and Texas Roadhouse.

In the pharmacy sector, Walgreens has nearly stopped doing new stores, and Rite Aid is focused on relocations, while CVS has been the most active of the big three. The high prices they all once paid for land is dramatically less. Of the big boxes, Kohl’s remains relatively active. Ultimate Electronics seeks to enter the market. As for the apparel retailers, Marshalls and TJ Maxx are doing well, as are specialty apparel retailers such as Forever 21 and Rue 21. Value-priced retailer Five Below, with everything priced from $1 to $5, is also active.

Finally, in the financial institutions sector, TD Bank is in the middle of a major expansion, while Bank of America and Sovereign have been very conservative in opening new retail branches. Among the regional banks, Webster, People’s United, Eastern, New Alliance, and Rockland Trust, to name a few, are opening new branches. However, the primary method of growth in this sector will continue to be through mergers and acquisitions. As for community banks and credit unions, there are more than 600 institutions headquartered in New England, and there are a number of new branches dotting cities and towns throughout the region.

As for the next 24 to 36 months, expect much the same as the last 2 years. For those landlords who still have the ability to write checks for tenant improvement dollars, they should have their pens at the ready — tenants are not being bashful.

— Richard L. Pilla is principal of Paramount Partners LLC, which is the New England member of Retail Brokers Network (RBN).

Connecticut Multifamily Investment Market

Despite short-term fears in the world economy sparked by the sovereign debt crisis, multifamily investment sales activity has started to improve dramatically in Connecticut. Although the recovery has been tepid in the Hartford and New Haven metropolitan areas, prospects for job growth and creation are positive.

Sales prices have held steady in Connecticut over the past 2 years, as owners have been reluctant to offer discounts in light of modest rent declines. Nevertheless, prices are expected to dip on a short-term basis due to previous revenue decreases and an overabundance of REO and distressed properties making their way to the market. Cap-rate rises should be modest, however, among Class A and B+ assets, where operating fundamentals have begun to improve quickly since the last quarter of 2009.

Local buyers continue to make acquisitions in Fairfield and New Haven counties, with a focus on historically stable, high barrier-to-entry markets. The pool of active investors for Connecticut multifamily properties has increased dramatically from the previous year as institutional investors re-enter the market and competition from private buyers intensifies. The median price has increased in both counties over the past year, though the gains are likely attributable to tight lending; constrained debt markets have caused buyers to focus on smaller properties, which generally trade at higher per-unit prices. In Fairfield County during the last year, the average deal size was nine units, compared with 38 units in the preceding 12 months, while the median price surged 36 percent. In the two major on-market transactions involving assets with eight or more units conducted during that time, the median price was $96,070 per unit, 7 percent below the previous year’s median. Similarly, in New Haven County, the average sold property size plummeted 73 percent year-over-year to 40 units. The median price, meanwhile, has climbed due to smaller property sizes, more upper-tier asset sales and milder rent declines.

Throughout Connecticut in 2009, 2,251 units traded for $188.53 million. Through April 30, only 315 units have traded statewide for approximately $16 million. Pending transactions anticipated to close in the next two quarters total more than $200 million, so a reasonably strong year for multifamily sales is anticipated, even though velocity is below 2008 and 2007 levels, when $800 million and $1 billion in transactions closed, respectively. While the first half of 2010 was challenging for the investment real estate market both nationally and regionally, multifamily remains the preferred product type for institutional and private investors. To that end, 2010 should close on a positive note and 2011 will see strengthening fundamentals, with some markets expecting double-digit rent growth and normalized levels of transaction velocity. The high barrier-to-entry, supply-constrained Connecticut apartment market is performing better than most other U.S. markets and investor demand well outweighs the current and anticipated supply.

— Steven Witten is a first vice president and senior director of the National Multi Housing Group in the New Haven office of Marcus & Millichap Real Estate Investment Services.

©2010 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.