COVER STORY, MAY 2008

NORTHEAST RETAIL REVIEW

In this month’s issue of Northeast Real Estate Business, our experts weigh in on the state of the retail sector in their respective markets. Strong fundamentals such as an active investment market, smart development strategies and stable leasing trends make the Northeast retail market a viable opportunity for retail developers, tenants and investors. According to our experts, the major markets within the Northeast are poised to post solid results in 2008.

New Jersey

This year will be exemplified as the year of cost cutting and cost saving. A recent article cited Wal-Mart as a preferred choice over Target during times of increased penny-pinching, and since Wal-Mart is often viewed as a barometer for the economy and subsequently for the retail market and vice versa, it is a practical leap of faith to assume that the American consumer will look to increase its practice of purchasing at a discount.

In addition, the upcoming presidential election will determine a great deal of the answers to this question. Most Americans feel that we need an infusion of confidence, particularly consumer confidence; therefore, our nation’s next leader will need to make this a powerful stance so that we as citizens find it within ourselves to shake off the sluggishness that we are feeling. Because the truth is that our economy isn’t nearly as bad as we think it is, it has simply become a self-fulfilling prophecy. People aren’t making less than they were a year ago, they are making more, so the resistance in spending as much as they once were is a self-inflicted fear of what may be to come.

Retail development has slowed down this year in New Jersey due to the state of the perceived economy combined with exorbitant land prices. Developers and retailers are being cost conscious and the days of developers and retailers overreaching financially for the sake of a prime location is being curtailed. Instead, developers and retailers are getting creative in their real estate exploration by identifying sites having lower acquisition or occupancy costs. Lifestyle centers and mixed-use developments will remain hot in the marketplace because they offer the consumer a pleasant shopping experience that feels like more of an escape than traditional retailing due to the combination of soft goods, hard goods and restaurants for the entire family.

Mixed-use developments act as de facto cities, offering the consumer a place to work, live, shop and eat within close reach. Another emerging market and excellent opportunity for retail (as well as other sectors) are those properties that are termed “brownfield sites,” or environmentally challenged sites. If one has the ability to exercise patience, they can make impressive deals with the municipalities where these problem sites are located.

The most significant development taking place in New Jersey is Xanadu, a glitzy theme-oriented project located in northern New Jersey. The multi-million-square-foot project will feature unique amenities such as an indoor ski slope as part of its allure. Other interesting components that will exist among the many retailers and restaurants are a children’s museum, a 250,000-square-foot aquarium and Muvico, billed as “The World’s Premiere Movie Experience.” Muvico offers moviegoers in-theater dining, babysitting and other distinctive amenities.

Evergreen Crossing

Another significant development is the mixed-use project known as Evergreen Crossing located in East Orange, New Jersey. Evergreen Crossing is a transit-oriented retail, residential, office and hotel project that is shaping up to be the “seed level” transformational project of this once depressed area. The project offers the shifting community a legitimate retail epicenter in a market that is rapidly changing. With more than 1 million consumers within a 10-minute drive time, Evergreen Crossing will be a great alternative retail destination for a market sector that is seeing an explosion of better housing opportunities.

Many of New Jersey’s once “challenged” submarkets are undergoing resurgences. Newark, for example, is a market that has been experiencing a turnaround over the past decade and development is moving forward there at a brisk pace. As a result, development has increased in the surrounding markets, such as East Orange, Paterson and Harrison, which offer similar demographics with land costs and incentives, making these markets more palatable for retailers and developers.

The reason for this is quite simple: some of these markets are the new frontier in development, in that developers are running out of viable product to effectively build upon. Also, some of these markets are grossly under-retailed and what were once deemed cautionary markets to enter are now considered potential goldmines because area residents have increased their disposable incomes exponentially.

Despite a slow down in retail development, retail leasing has been active, although retailers have been cautious. Developers are always on the lookout for retailers with strong credit and a concept that will increase draw in a project. Also, those retailers that are considered staples of a project, such as banks, food uses, drug and HBA’s are always in high demand as they provide an ongoing service and need to the consumer.

— Daniel J. Geller is a vice president in CB Richard Ellis’ Hoboken, New Jersey office

New York City

502 Metropolitan Avenue

New York City continues to defy and surpass all expectations, and as such, has become one of the most sought after retail markets in the world. According to Marcus & Millichap’s 2008 National Retail Report, rents are expected increase in all five boroughs of New York City, the vacancy rate is forecast to end the year at 5.4 percent and nearly 1.1 million square feet of space is slated for delivery in Manhattan and Brooklyn. New and redeveloped residential projects have been driving the retail sector, as well as the change in the demographics in many of the city’s neighborhoods.

As the concept of mixed-use evolves, many developers are incorporating substantial retail components within new high-rise residential towers. “In the past, retail was found almost only on the ground floor, but now, it has become such an important component, mixed-use projects and even some residential buildings are being planned with up to 8 floors of retail,” explains Ben Fox, president of Winick Realty. “Many developers also started involving retail brokers at the beginning of a project in order to design and create a component perfectly suited for retail.”

Retailers with well-known, established brands are always sought after in new retail projects, but the type of tenants developers hope to bring into new projects typically varies from neighborhood to neighborhood in New York City’s five boroughs. “In the Financial District, there is a heightened demand for luxury retailers because of the high-end buildings, but in Brooklyn, supermarkets and service-oriented retailers are more in demand,” says Fox. “We are handling a lot of space in Brooklyn and we are hearing quite a bit of interest from retailers ranging from apparel to supermarkets to everybody in between.”

For example, Trader Joe’s and Urban Outfitters, which did not even consider Brooklyn as a destination a few years ago, have now taken space there. “In downtown Brooklyn, the activity is being driven by a mix of residential and commercial development, and the fact that the entire population in that area has shifted,” says Fox. In addition, according to Marcus & Millichap’s 2008 National Retail Report, upcoming high-profile projects such as the Atlantic Yards mixed-use development will offer 247,000 square feet of retail, and recent rezoning in neighborhoods such as Bedford Stuyvesant, Fort Hamilton and Dyker Heights will likely bring a plethora of retail growth to those areas as well.

“Activity is as tight as always and rents are as expensive as always on the prime shopping streets of every neighborhood in Manhattan,” notes Fox. Thus, while the Manhattan retail sector has very few gaping holes, retailers continue to find space within this borough’s unique, niche neighborhoods. Retail space has opened up within luxury residential towers on the far West Side, as well as in certain spots on the Lower East Side.

In addition, several buildings in the Financial District have been redeveloped, resulting in new residential and retail space. Winick notes that there are approximately 29 buildings under construction in the Financial District — 19 conversions and 10 new builds — and as of December, there were seven new buildings proposed. According to Fox, in the past 2 years, 35 major retailers have opened up or are slated to open soon in the Financial District. Just a handful of the retailers opening up in the area include Hermes, Thomas Pink, Canali, Bed Bath & Beyond, Tiffany’s, and Whole Foods. The Financial District will continue to grow in the next few years, especially once Silverstein Properties completes construction on the World Trade Center towers, which will bring more than 500,000 square feet of retail to the area.

“It is possible that secondary and tertiary markets may see some sluggishness if retailers pull back from expansion,” notes Fox. “However, even as some retailers, in particular luxury retailers, slow down their expansions, foreign retailers are filling up that space to take advantage of the weak dollar.” Many foreign retailers, such as H&M and Zara, are opening second stores on Fifth Avenue. To combat any slow down in expansion, Fox speculates that luxury retailers may begin to open smaller stores with more affordable inventory to continue to appeal to the middle class market. Overall, 2008 is anticipated to be another banner year for the New York City retail market.

— Stephanie Mayhew

Philadelphia

According to Rob Samtmann, a principal with Equity Retail Brokers in Conshohocken, Pennsylvania, 2008 and 2009 will be “cautious” years for both retail developers and tenants in the Philadelphia area, and the term “growth” should be and will be used carefully as well. However, strong fundamentals within the different retail submarkets in Metro Philadelphia keep the city strong and activity flowing.

Center City

The Center City retail market remains a distinct draw for regional and national retailers, and as such, the area is expected to maintain continued growth in the retail, restaurant and hospitality sectors. Areas such as Walnut Street, with its highly trafficked storefronts and national “boutique” and niche retailers, have become popular shopping destinations. As this area gains momentum from heightened demand and growing rental rates, the activity is anticipated to spill into neighboring Broad and Chestnut streets.

Due to open this year, the Comcast Tower, the most significant development in Center City, will feature a mix of local retailers native to Philadelphia and high-end restaurants. In addition, the mixed-use office building will feature a well-fixtured atrium with retail presence. Also incorporated into the complex is access to and from Suburban Station, which will certainly help increase its influence on the neighborhood and draw in more consumer traffic. Retail in the immediate area (such as Arch Street) will see a change to more sophisticated retail now that its impact is beginning to be felt.

Slated to double in size, the convention center will also bring more retail attention to Center City. In conjunction with the expansion, several hotel developments are also being planned, which should bring in more retail dollars to the city. In addition, the Navy Yard area is poised for growth as well as the Market Street/Drexel Street corridors, and the city is also trying to encourage growth up Broad Street, north of Spring Garden Street.

However, despite the aforementioned growth, there are pockets with weak or dying activity, meaning that Center City retail leasing can change in a matter of a few storefront’s street location. As three or four blocks of Walnut and Chestnut streets thrive, being located half a block in the wrong direction can make the difference between a landlord obtaining a national client or a local coffee shop. Thus, retailers have become even pickier in terms of placement as they realize the importance of pedestrian flow and where the office employees spend their free time to eat or go shopping. Retailers are not expected to abandon expansion plans, rather, they will tighten up site selection criteria, only choosing sites that clearly meet their new standards.

Casual dining restaurant properties that border the city have suffered slightly, but this is likely due to the current nationwide crisis that has reduced customers’ discretionary income in response to the increasing prices of gas and other necessities, in addition to basic economic worries. This slow down has also begun to affect fast-casual dining establishments as restaurants such as Starbucks and Panera Bread have slowed expansions and adapted more stringent measures. Although once a sure bet for retail developers, the expansion of banks has begun to slow down in response to the general credit crisis as well. However, certain high-end retailers are still thriving and in demand along Center City’s most popular retail corridors. Lacoste and True Religion recently entered Walnut Street, and other sites within the marketplace, indicating that the demand for high-end retail has not ceased.

— Rich Zeller is an agent with Equity Retail Brokers, and Bart Delfiner is a principal with the firm

Philadelphia County (other than Center City)

Retail leasing activity throughout the county of Philadelphia has been slow to moderate, with some areas stronger than others. Strip centers have dominated the retail landscape in this Philadelphia market, and although much of the county has been redeveloped, several new centers are set to come out of the ground and many redevelopments are underway as well.

One of the largest retail projects on the horizon in West Philadelphia is ParkWest Town Center. The 340,000-square-foot center set to open in 2008 and will be anchored by Lowe’s and ShopRite Supermarket. Situated in Pennsylvania’s largest Federal Empowerment Zone (EZ), 30 percent of all profits will be reinvested directly back into the community. The development is also benefiting from the Pennsylvania Department of Community and Economic Development funding, with minority participation in excess of 35 percent.   

In the northeast region of Philadelphia on Cottman Avenue near Castor Avenue, the old JC Penney building is undergoing a significant redevelopment, which upon completion, will feature several junior-box tenants. Nearby, along Bustleton Avenue, just off Cottman Avenue and across from the Roosevelt Mall, is the future development site of a new Target and PetSmart.

 Progress Plaza, in North Philadelphia on Broad Street near Temple University, is undergoing a significant redevelopment. Set to open later this year, the center will include a new anchor, a 42,000-square-foot Fresh Grocer. The project will also include the redevelopment of the other existing neighborhood retail stores in the center. This is one of the few retail redevelopment projects in the North Philadelphia community. In the Aramingo Avenue retail market, just north of Castor Avenue, there are plans for a new 280,000-square-foot center, which is set to be anchored by Lowe’s, plus some other junior-box fashion tenants. 

Throughout the rest of 2008, retail vacancy rates in selected markets in the Philadelphia County area will most likely increase due to general economic conditions and the fact that a number of larger anchor and junior-box retailers are slowing their expansion plans or putting them on hold. 

— Stuart F. Conston of Equity Retail Brokers

Suburban Philadelphia

Generally, leasing activity has been satisfactory in suburban Philadelphia, but tenants are being cautious in regards to how they proceed with future plans and they are becoming more selective on the sites they pursue. In addition, tenant’s who rely heavily on the disposable income of consumers will likely slow down new store expansion. Some retail tenants are also pulling back expansions due to a limit on the amount of capital available for new store openings since rising interest rates have made it more expensive to pay for and open new stores.

Retail development in suburban Philadelphia has been affected by the current economic environment, but it is still a robust area ripe for future development. This year, developers and brokers will focus on ensuring that their sites remain viable and progress through the pipeline while securing solid tenant line-ups. Higher interest rates are affecting pro-forma financial statements, and many projects that were started 3 years ago are now exhibiting a lower rate of return. In addition, several projects set to begin have been significantly affected as the big four, Home Depot, Lowe’s, Wal-Mart and Target, pull back on new store expansions. Bank pads — whether they are in front of a center, in a small retail development or by themselves — are taking more time to fill as expansion in the banking community quiets down.

As residential and commercial development spreads out, many viable development sites are now located in what were once considered fringe markets. The opportunity is there for developers and tenants who can uncover ways to satisfy these markets and develop or re-develop properties. Over the last 10 years, there has been a great deal of residential growth in King of Prussia, Trooper, Oaks, Royersford, Limerick, Sanatoga, and Pottstown along the Route 422 corridor, which in turn has resulted in more retail development. Currently many of these towns have a fair amount of retail space still available, which suggests that the retail space has now exceeded the residential population.

Quakertown, in Bucks County, is also facing the same plight. On paper, it would appear that these areas offer fundamentally viable real estate opportunities; however, there isn’t enough existing population to warrant additional retail demand, leaving in its wake available space and land. Developers have to be cautious of placing new projects in thinly populated markets or trying to create a new retail corridor as the call of the “retail gravity” is hard to ignore for many tenants.

A few retail developments underway include the Wegmans-anchored Providence Town Center in Collegeville; Levittown Town Center in Levittown, which is anchored by Home Depot & Wal-Mart; Upland Square Shopping Center in Pottstown, proposed anchors include Giant, Best Buy, Target and JC Penny; Worthington in Malvern, which is also anchored by Wegmans; Logan Commons in Swedesboro, proposed anchors include Lowe’s, Target and Kohl’s; and in King of Prussia, The Village at Valley Forge, which is proposed to include a Wegmans anchor.

Overall, there are opportunities for retail even in challenging markets in Philadelphia. This business is like golf, “Every shot is good for someone.” The tenants, developers, owners, and brokers who understand how to adapt and overcome will find opportunity in this economic environment. 

— Rob Samtmann is a principal at Equity Retail Brokers

Amherst Crossing Amherst Crossing In Amherst, New Hampshire, Berkshire is constructing Amherst Crossing, a 125,000-square-foot multi-tenant, big-box retail center. The new center is located just 10 miles west on Route 101A in southern New Hampshire’s most densely populated high-income trade area. Route 101A offer sgreat visibility for retailers since many consumers use the corridor on their daily commutes to Nashua and northeastern Massachusetts. “Amherst is a growing submarket that will help take the pressure of the maxed out retail market in Nashua,” explains Phelan. “It was also identified as an area that Sports Authority and Circuit City wanted to open secondary locations.” Tenants include Sports Authority, Circuit City, Micheals, PetCo and Famous Footwear. Construction of the center is nearing completion and a grand opening is set for August. — Stephanie Mayhew

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