COVER STORY, SEPTEMBER 2004

SELLING POINTS
Brokers discuss the current state of the retail market and what the future holds for retail in the Northeast.
Lara Fuller

Mirroring the changes in the economy, the retail market in the Northeast has begun a steady, though slow, recovery. With continuous growth forecasted for much of the region, many retail developers are looking beyond traditional retail sites. There has been a move towards more lifestyle-oriented centers as well as redevelopment and infill projects. Northeast Real Estate Business recently spoke with Steve Gartner, president of Metro Commercial Real Estate; Daniel Geller, director of the retail division at The Shultz Organization/TCN Worldwide; Patrick Smith, principal at Staubach Retail; and Jeff Cohen, partner with Fameco Real Estate, to get their take on the current and future state of the Northeast retail market.

NREB: How does current activity in the Northeast’s retail sector compare to this time last year?

Gartner: The economy seems stronger and more confident this year, especially as we get farther away from September 11, 2001, which was hard on the industry well through 2002.

Geller: From a retail sales standpoint, business is up a bit from last year. Gasoline prices have risen and people are staying closer to home and spending a little more for retail purchases. From a retail real estate standpoint, the market has not softened since last year, but there are some bargains available on Class B space.

Real estate for restaurants is as tight as ever with many restaurant chains vying for the same space. Retail sales in New Jersey shopping centers were $32.6 billion in 2003. That is a 5.5 percent increase from the sales figures of 2002. I believe this trend will continue, with the retail sales of 2004 increasing over those of 2003.

More generally speaking, most of the vacated Bradlees, Ames, Jamesways and Kmarts have been absorbed. Development and redevelopment projects are abundant throughout New Jersey in varying degrees of approval. The entitlement process in New Jersey is long and arduous and can get very expensive, but because of New Jersey’s demographics, developers stick it out. On the tenant side, more retailers are looking for locations in New Jersey.

Cohen: Currently, leasing activity is slightly ahead of what it was at this time last year. Leasing activity within some project types, such as lifestyle centers, is ahead of last year’s pace.

NREB: What are your predictions regarding retail leasing activity for the rest of the year?

Gartner: We are still hampered by the availability of viable sites for the very active big box retailers, but the demand remains extremely brisk in moving forward. The trend in this business is that central retailers need locations; therefore, there is bound to be activity wherever you can find viable opportunities to have profitable stores. It appears that the barriers, which formerly existed in the minds of retailers, are down and they are looking at all opportunities, including urban areas, college campuses, and infill and rural sites. The easy sites are by and large gone and retailers have gotten creative while still staying somewhat conservative with their expansions.

Geller: Since it appears that rents are holding firm or rising, leasing activity should continue to enjoy demand in key markets throughout New Jersey. We are not in a low nor in a peak cycle — we are in a steady cycle where retail rents are stable and I expect to see an increase or decrease of no more than 3 percent.

Cohen: There will be a significant increase in activity for the remainder of 2004 and 2005. This is predominantly due to the advent of lifestyle centers which were planned and are now coming to fruition. Strong activity will continue in the big box category as well.

NREB: What is your outlook on retail sales activity for the rest of 2004 and for 2005?

Gartner: Overall, a healthy economy helps both retail leasing and retail sales. While retail leasing is driven by the desire to be in a specific location, retail sales are driven by investment vehicles. Investment sales have been driven by the continuing voracious appetite of both private and public real estate firms to acquire retail projects. The recent up-tick in interest rates appears to have done little to slow the acquisition fever. It’s anyone’s guess as to what happens to interest rates through 2004 and 2005, given the political climate.

Geller: Given a recovering economy, I expect to see retail sales remain steady and strong. This trend should maintain itself for the foreseeable future and I do not expect to see any incredible spike or downward swing. The current retail market is simply reflective of the slowly improving economy.

Smith: I believe there will be slow and steady growth in the larger markets of the Northeast.

Cohen: A decrease in sales activity is predicted in 2005 as interest rates are expected to rise after the presidential election in November. In the near term, an increase in activity will be precipitated by investors wishing to capitalize on product while the rates are still at their present levels. However, some investors continue to overpay for unanchored centers with the expectation that the cap rates will remain favorable although the risk is higher.

NREB: How does the rest of the year, and next year, look in terms of retail development activity?

Geller: I do not expect to see a great deal of new development, but rather more refurbishment and re-tenanting of existing centers.

Smith: Most of the preliminary markets in the larger cities are fully developed, so most of the new growth is driven by redevelopment and infill. We have seen, and will continue to see, growth of the big boxes, such as Wal-Mart, Target, Lowe’s and The Home Depot. There will also be the planning and development of lifestyle centers in the areas not serviced adequately by major malls.

Cohen: We predict an increase in development through 2004 and 2005 due in part to the large number of lifestyle centers in the pipeline as well as the ongoing appetite for this product type. Conversely, grocery-anchored centers are reaching near saturation levels and should decrease in number in the coming year. More stringent zoning regulations, particularly in New Jersey, may also impact development in 2005.

NREB: Which Northeast retail markets are expected to do well in 2005? Why?

Gartner: Anywhere that there is population growth is indicative of retail growth to follow. Atlantic County, New Jersey, and the Atlantic City suburbs, are seeing phenomenal growth fueled by the growing casino industry and related businesses. Retail in Atlantic and Cape May counties is spreading to Vineland, New Jersey. Cumberland County, New Jersey, is experiencing retail growth on the heels of population growth. Center City Philadelphia is experiencing phenomenal population growth, and, as a result, retail is becoming more fortified in the area. Again, we see retail growing where there are people growing, which is also prevalent in tourist areas such as Atlantic City and Stroudsburg, Pennsylvania. Stroudsburg is capitalizing on both winter and summer vacationers in the Pocono region.

Geller: New Jersey will do the best because of the strength of the demographics and economy in the state. New York will always do well, as will Connecticut — all due to their high populations and solid economies.

NREB: Which Northeast retail markets will struggle in 2005? Why?

Gartner: In the Philadelphia region, we are always battling a less rapid growth than the southern markets. We continually try to compete for the hearts and minds of retailers with dense population, good education and higher income residents. The region will continue to fight that fight.

Cohen: We envision product type and individual projects, not market, as the predictor of leasing activity in 2005.

NREB: What are some of the more significant retail developments taking place in the Northeast?

Cohen: In Dover, Delaware, Camden Town Center is a significant new development. The 500,000-square-foot project will be anchored by a 200,000-square-foot Wal-Mart Supercenter and a 160,000-square-foot Lowe’s. Other tenants include Applebee’s, Dunkin Donuts and Bob Evans. A third phase of the project will include 80,000 square feet of retail space and three restaurant pads. The balance of the development will consist of 240 single-family homes and more than 180 townhomes, which are currently under construction. Additionally, there are 2,000 residential units in various stages of approval or under construction within 3 miles of the site.

Also of note is The Shoppes at Villanova in Villanova, Pennsylvania. The 90,000-square-foot project features three floors of retail space. A 20,000-square-foot gourmet food store will anchor the center. This lifestyle center is under construction on Philadelphia’s prestigious Main Line, one of the most affluent communities in the region. It will be located at the junction of Route 30 and Interstate 476.

Gartner: In Philadelphia, Metro Commercial is seeing three power centers being completed within the confines of the city. Whitman Square will be anchored by Lowe’s and Wal-Mart. Additionally, QuarterMaster and Columbus Commons, located in South Philadelphia, will total approximately 1.5 million square feet of power retail.

Geller: In Elmhurst (Queens), New York, the Queens Center Mall expansion is open and nearly completed. This project has doubled the size of the existing center. Traditionally it has been a very powerful mall, but it was lacking adequate parking and had many tired-looking retail concepts. The new expansion includes many forward-thinking retailers, a beautiful new food court and a great deal of added new parking.

Also, many people in New Jersey and throughout the country are closely watching the planning and development of the Xanadu project. This is a collaborative effort headed up by The Mills Corporation in partnership with Mack-Cali Realty and the New Jersey Sports and Exposition Authority. Xanadu is a 4.8 million-square-foot project that will combine retail, office, hotel, dining and entertainment uses.

As a destination center, it is expected to attract millions of people a year.

NREB: What are your predictions for 2005? Do you expect to see any retail trends emerge or fade?

Geller: One of the trends gaining momentum is the focus towards redeveloping downtown commercial locations within many different townships in New Jersey. With major retailers trying to find ways to get closer to the consumer, you will increasingly see a trend of public officials taking into account the importance of better planning to incorporate smarter parking along with larger store configurations. Town center plans that incorporate smarter parking and larger box capability will start attracting more recognized tenants. You may even see larger tenants, such as a grocery anchor, fitting into the town center landscape. Fast casual restaurants will continue to expand and thrive within the market, as will entertainment-based retailers. I believe that lifestyle retailers will continue to grow and capture market share and become fixtures within the major markets.

Smith: The outlook is very strong. The high barriers to entry in Northeast markets, strong population density and high incomes ensure success for major retailers, should they make it through the onerous entitlement process.

Cohen: With regard to Delaware, development has been limited north of the Chesapeake and Delaware Canal due to zoning restrictions. It is here, however, that 75 percent of the Delaware population resides. Consequently, much of the new development there is from projects that have been in the pipeline for many years. The beneficiary of these restrictions has been those areas in southern Delaware such as Dover, Middletown, Smyrna, Georgetown and Rehoboth which are beginning to experience renewed development activity.

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