COVER STORY, JUNE/JULY 2011

RETAIL REGENERATION
New England retail markets are seeing leasing and development activity.
By Savannah Duncan

The retail real estate market is slowly picking up in some areas of the country compared to 2010. While New England has always been a slower growth market — the established nature and barriers to entry can make retail development a challenging process — the area has remained relatively healthy throughout the recession. As a whole, some retailers, such as fast-casual restaurants, supermarkets and discount retailers are expanding in the market.

“The retail market is starting to move again,” says Neil Denenberg, president of Boston-based Denenberg Realty Advisors. “In New England, we are seeing more retailers reach out to find space. Demand is such that the choice retail spots are being filled.”

Massachusetts and New Hampshire are seeing the most activity, with Maine, Connecticut and Vermont seeing movement as well.  In Vermont, there is less vacancy compared to mid-2010, says Yves Bradley, vice president of commercial brokerage for Burlington, Vermont-based Pomerleau Real Estate. “We’ve got a market that’s really in balance, at least in terms of the supply side of retail,” Bradley says.

On the other hand, because Rhode Island was hard hit with unemployment, consumer spending and confidence is down and activity remains low, says Matt Halprin of Wethersfield, Connecticut-based New England Retail Properties.

Deal Velocity

Retail leasing activity has increased across New England as new retailers that previously saw the area’s limited space a barrier to entry move into the market. Discount retailers like Family Dollar and Dollar Tree are expanding, and Dollar General has recently entered Connecticut for the first time, says Halprin.

“There are other retailers who are doing pretty well in New England, including Tractor Supply Company, which is a 1,100-store chain that is expanding throughout Connecticut and southeast Massachusetts,” Halprin says. “They have stuck to their plan of opening 60 to 80 stores nationally per year, and they are one of the few retailers that continued to grow through the recession.”

Fast-casual restaurants, like Chipotle, are also expanding in New England, according to Halprin and Joel Kadis, partner in charge of leasing for Burlington, Massachusetts-based Linear Retail Properties. “We’re also seeing activity in the banking sector with a few banks expanding, especially in Connecticut,” Halprin says.

Additionally, grocery store chains are expanding. “Certainly the most active larger scale retailer we’ve seen is Market Basket,” says Chris McMahon who works in commercial sales and leasing at NAI Norwood Group’s Portsmouth, New Hampshire, office. “Market Basket stores have been sprouting up and adjacent tenants have been growing around these stores as well.”

Andrew Levy, vice president and director of retail leasing for Londonderry, New Hampshire-based The MEG Companies, says that in southern New Hampshire and northern Massachusetts smaller leasing transactions are happening in shopping centers, mostly with discount retailers and fitness chains. He recently signed a lease for a 22,000-square-foot Planet Fitness to join a mall in Nashua.

“Landlords dealing with some vacancies in secondary markets are having a difficult time, even if they are willing to be flexible with terms,” says Joe Morrison, vice president at Natick, Massachusetts-based Crosspoint Associates. “However, in solid markets we’re finding that there’s quite a bit of competition from the tenant perspective. In one recent situation, we had tenants bid each other out on an available space for the first time since 2006.”

While leasing activity is strong, the tenants still have the advantage in most transactions. However, Morrison says that landlord attitudes vary on a case-by-case, market-by-market basis.

Chris Norwood, executive vice president at NAI Norwood Group’s Bedford, New Hampshire, office, reports that landlords in New Hampshire are still willing to negotiate. “The landlords that can get the most creative in terms of a proposal are going to win the deal, mainly through offering some kind of incentive over other properties,” he says.

According to Denenberg, “The price point at this time is still at the lower end of where landlords want it to be, and they are still giving deals to get tenants in their spaces. But there are people out there now looking to fill up those spaces and as that happens and demand continues to increase, landlords are going to get a little tighter on their prices.”

Kadis agrees that as space starts to fill, landlords are going to be more aggressive. “Landlords have become more flexible over the last 24 months,” he says. “With that said though, the trend is towards stability and an underlying strength in the market. I don’t think it’s a landlord’s market yet, but I am more optimistic and see more stability.”

New Development

Many developments started pre-recession have opened and brought with them new stores to serve their trade areas.

A new 80,000-square-foot Market Basket recently opened in Phase I of the 288,000-square-foot Brickyard Square in Epping, New Hampshire. The center is one of two developments under construction in New Hampshire by Waterstone Retail Development, says Josh Levy, principal and director of leasing for the company’s Needham, Massachusetts, office.

Phase II of Brickyard Square is scheduled to begin construction in September and is expected to open in April 2012. Upon completion, the center will feature Marshalls, PetSmart, Famous Footwear and Dress Barn, among other retailers.

Waterstone is also redeveloping and expanding Southgate Plaza in Portsmouth, New Hampshire. Currently 166,050 square feet, the plaza will contain more than 250,000 square feet upon completion, including a new 40,000-square-foot McKinnon's Market & Super Butcher Shop.

The Wilder Companies, New England Development and Brendon Properties are developing more than 1 million square feet at Northborough Crossing, including 600,000 square feet of retail space. Wegmans will open its first Massachusetts location at the center, which is located in Northborough, Massachusetts.

In Northborough, Massachusetts, The Wilder Companies, New England Development and Brendon Properties are under construction with the more than 1 million-square-foot Northborough Crossing, 600,000 square feet of which will be retail space. Wegmans will open its first Massachusetts location at the center. 

”We are very proud to bring the first Wegmans to Massachusetts and to be able to open a center in 2011 that was built and developed during the last 3 years,” says Andrew LeGrega, principal of leasing and marketing at Boston-based The Wilder Companies.

Beverly Farms, Massachusetts-based Coastal Partners is also developing a 300,000-square-foot project called Shoppes at Londonderry, located in Londonderry, New Hampshire. The project is currently in the permitting process. The first phase, totaling 120,000 square feet of retail space, is slated for completion in fall 2011.

While the new developments are a positive step, LeGrega says many developers are acquiring retail properties and taking on redevelopments instead of creating new developments because of the cost to build and the lending climate.

McMahon agrees, adding that developers have to find new ways to re-use existing real estate.

“We had an interesting deal in Derry [New Hampshire] where a developer purchased two car dealerships that were side-by-side,” he says. “He is renovating one of the buildings and tore down the other to construct a new retail space. It’s a great location where we are trying to re-use a property. It’s a good example of someone taking advantage of the times.”

The 19,000-square-foot former dealership building is being renovated for a local pet supply store, and on the other site, a new 16,000-square-foot building is under construction for Goodwill.

However, Halprin says that before widespread new development can occur, there is a large amount of empty big box space that must be filled.

“There’s a 3- to 5-year inventory of vacant space in New England on the whole that needs to be absorbed before we see new development here,” Halprin says.           

Investment Sales

Marcus & Millichap second quarter data shows multi-tenant sales down 10 percent during the last 12 months, but that average cap rates have tightened by 50 basis points during the same time frame. Marcus & Millichap reports that one of the strongest sales markets for multi-tenant sales is that south of Route 128 in Massachusetts, where properties trade for at cap rates less than 7 percent.

The biggest recent transaction in New England was WP Realty’s purchase of a portfolio of seven centers anchored by Shaw’s and a freestanding Hannaford Brothers store. Five of the properties are located in Massachusetts, two are located in Maine and one is in Rhode Island. The centers total more than 650,000 square feet.

A few recent deals have highlighted investment sales in the New England region, among them Linear Retail Properties’ $8 million purchase of the 41,000-square-foot East Greenwich Commons in East Greenwich, Rhode Island. CVS/pharmacy, Starbucks, Webster Bank, and several restaurants anchor the two-building property.

Another is the recent $21 million sale of the 187,000-square-foot Derry Meadows Shoppes, located on Manchester Road in Derry, New Hampshire, which Katz Properties of New York purchased from Real Estate Capital Partners/USA Property Trust.            

Looking Forward

Norwood says that until consumer confidence picks up, the market will remain relatively flat. However, he says that good developers are thinking ahead.

“Smart developers are playing for the future,” Norwood says. “They are investing today in land development so that they’ll be ready when confidence picks up.”

Andrew Levy believes the retail market will continue to stay the same with some leasing occurring, a few sales and maybe a few developments. “Retail isn’t a fast moving train; it’s a byproduct of income, which is a result of jobs and consumer confidence, both of which are lacking right now,” he says. “Vacancies are getting filled up, it’s just going to take some time.”

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