COVER STORY, SEPTEMBER 2006

IT’S A RETAIL FRENZY IN NEW JERSEY AND PHILADELPHIA!
A lender’s perspective of the money markets for some major property types in the Northeast.
Interviews by Stephanie Mayhew

Activity in the retail sector in the Northeast continues to reign supreme. As the population continues to explode and consumer demand heightens, developers and brokers are coming up with increasingly unique ways to dominate the industry and give the consumer what they did not even know they were looking for. In our New Jersey/Philadelphia retail report, Northeast Real Estate Business takes a closer look at two markets that are making people sit up and take a second glance. Contributors to our New Jersey retail report include the following:

Chuck Lanyard is a principal and the director of Brokerage Services for The Goldstein Group, which is headquartered in  Glen Rock, New Jersey. Lanyard specializes in retail properties and focuses on Northern and Central New Jersey.

Bart Delfiner, a principal at Equity Retail Brokers, Inc., who specializes in  retail properties focusing on a mixture of leasing, sales and tenant representation. Delfiner covers mainly Camden and Burlington, New Jersey, with a concentration on Gloucester County.

David Dunkelman, the vice president of the retail division for Colliers Lanyard & Axilbund. Dunkelman specializes in retail and covers southern New Jersey from Mercer County south to Cape May County.

Mike Horne, who specializes in retail real estate for Fameco Real Estate, LP. Horne covers central and northern New Jersey.

Contributors to our Philadelphia retail report are:

Rob Samtmann, a principal at Equity Retail Brokers, headquartered in Conshohocken, Pennsylvania. He specializes in retail and covers eastern Pennsylvania.

Peter A. Bonanni, vice president, of the retail division at The Kislak Company, headquartered in Woodbridge, New Jersey. Bonanni specializes in retail investment sales, and covers the Delaware Valley market, which encompasses suburban Philadelphia, central and southern New Jersey. 

Steven H. Gartner is the president of Metro Commercial Real Estate, Inc., which is headquarteres in Conshohocken, Pa. Gartner covers an area ranging from New York to Washington, D.C.

Richard L. Soloff, a partner and executive vice president of the retail division for Colliers Lanyard & Axilbund.

 Soloff focuses on all of eastern Pennsylvania, southern New Jersey (Mercer County south) and Delaware. He also specializes in the retail market. 

Brandon Famous, the CEO of Fameco Real Estate, LP, which is based in Plymouth Meeting, Pennsylvania. Famous covers southeastern Pennsylvania, southern New Jersey and Delaware. He also contributed to the New Jersey retail report.

New Jersey

NREB: How would you characterize retail development activity in your area this year?

Lanyard: Retail development in New Jersey is very active. New retail projects include shopping centers, redevelopment projects, town center projects, mixed-use developments and lifestyle shopping centers. Examples of town center or mixed-use projects are occurring in communities such as Harrison (MetroCentre), East Orange (Brick Church Commons), Bloomfield, Dunellen, East Brunswick, Edison, Manalapan and Paterson. Lifestyle centers are also increasing in New Jersey. Examples are in communities such as Shrewsbury, Denville, Woodcliff Lake, East Brunswick, Clifton, Old Bridge, North Brunswick, Flemington, Chester and Bridgewater.

Delfiner: Over the past several years, there has been a significant population increase in Gloucester County. Because of the continued population growth, there has been a strong demand from retailers to expand into Gloucester County. Thus, there are a number of new small, medium and large-scale retail centers that have either been constructed, approved or are planned for the county.

Horne: Retail development activity has slowed due predominantly to two factors — scarcity of land and an arduous permitting process. However, despite these forces, there are still new developments in the pipeline.

NREB: How would you characterize retail leasing activity in your area this year?

Lanyard: Retail leasing is very competitive due to limited space. There are low vacancy rates in key markets. Many new players and concepts are entering the New Jersey market, while others continue to expand.  For example Wegmans, Whole Foods, Wild Oats, Golfsmith, Golf Galaxy, Red Robin, Applebees, Fuddruckers, I sold it on Ebay, The UPS Store, H&R Block and many banks are seeking locations. Urban retail has also sparked leasing activity, especially in Newark, East Orange and Paterson. Certain big box stores such as Office Max and Treasure Island have announced closings, which has created a flurry of activity for bigger stores.

Delfiner: Leasing activity is strong both for local and national tenants seeking small shop space as well as larger retailers and pad users.

Dunkelman: Leasing, which has been boosted by new construction, has continued to be very dynamic. New projects have attracted several new tenants to the market and have enticed several key tenants to relocate. 

Horne: Competition for quality sites remains strong; as a result, even properties that are considered B sites have high occupancy rates.

NREB: How would you describe the investment sales activity in your area?

Delfiner: The investment market has been very strong on the demand side for the last several years. This continued demand has been reflected in lower CAP rates and the increase of asking prices for land. Although investment properties are still available and investment sales transactions continue, their pace has somewhat waned due to these costs pressures.

Dunkelman: The demand for investment sales has remained strong, but with an increasingly limited supply of offerings.

Horne: From an investment perspective, there is a strong interest in all retail property types. Prices have begun to stabilize as interest rates rise and cap rates have crept up accordingly. Institutional investors have begun to sell some properties which are considered to be at full value.

NREB: What New Jersey retail markets (or submarkets) have grown in the past year and which markets are poised for growth in 2006? Why?

Lanyard: The following retail markets/submarkets have grown in the past year:

Paramus continues to be one of the best retail markets in the country. Paramus annually records the largest dollar volume in retail sales, more than $5 billion, than any other zip code. It is a very desirable location for retailers due to its location at the crossroads of several New Jersey highways, its commuter traffic to and from Manhattan, and high household incomes throughout the region.

Route 23 running from Wayne through Butler is growing because of its close proximity to Interstate 287. In addition, there is quite a bit of new housing being developed in that area.

Route 3 in Clifton has great demographics and seven-day-a-week traffic from Bergen County.

Monmouth and Ocean County are having pockets of tremendous growth due to population migration and lower housing costs along with good highway accessibility. Examples are in Brick, Toms River, Manalapan, Manahawkin, Howell and Neptune.

Delfiner: The markets which have generally been considered fringe markets have seen population growth and a strong retail demand over the past several years.  This has been more prevalent in Burlington and Gloucester counties than in Camden County due mostly to the greater availability of undeveloped land in those two counties.

Dunkelman: As developers recognized the potential of the busy Route 130 corridor in Burlington County, this market has been revitalized with the completion of Hartford Corners and Millside Plaza. In addition, New Plan has recently announced the redevelopment of the Cinnaminson Mall. 

The Route 38 corridor is thriving due to infill development opportunities on the western end and population growth, which has spurred new development on the eastern portion. In Burlington County,  Centerton Square has added to the presence of the existing regional trade area, and in Cherry Hill, several new tenants have opened at the Garden State Park development on the former Garden State Race Track site.

The New Jersey Shore communities have been very active, particularly Atlantic City with its new high-end retail developments and the success of the outlet center. Mays Landing and the Route 9 corridor in Ocean and Cape May counties are also growing.  

Gloucester County is poised for development, particularly along the Route 42 corridor and in rapidly growing residential areas such as Logan and Woolwich townships, which had once been an under-served retail market.

Horne: New retail development has occurred in pockets throughout the state. Markets that have seen significant growth include southern Ocean County in the Lacey area, which has had several new projects approved, and Rockaway Township, which has had two major developments open. Many urban markets are poised for growth due to the adoption of the New Jersey Smart Growth Plan, which encourages urban redevelopment.  Newark, Lodi, Patterson, Kearney, North Bergen, Bayonne, Passaic, Edison and Harrison have significant retail projects proposed. This growth is being fueled by public-private initiatives designed to gentrify urban areas. Obsolete industrial sites are being redeveloped into retail and mixed-use projects that may also include office and residential components.

Famous: The growth here has also spurred residential construction in once quiet hamlets like Mays Landing. Mays Landing has now become a sought after market for many retailers. Additionally, markets such as Vineland/Millville, Delran and Cinnaminson have emerged as desirable retail corridors.

Emerging growth areas in the region include Medford, which will boast a new 600,000-square-foot center that has already secured Target, Home Depot, Best Buy and Staples, among others. Gloucester Township is poised to gain momentum. Due to residential growth, established retailers in the region have benefited from strong store performance and are now looking to supplement their store base with additional locations in close proximity to their existing ones. On Berlin Cross Keys Road alone there are five new proposed developments with a mix of new retailers to the market as well as a healthy dose of existing ones. Similarly, in Logan Township residential construction is on the rise. This has spurred the development of close to 1 million square feet of new retail development.

NREB: What types of retail properties are hot in the New Jersey market? Why?

Lanyard: Supermarket anchored/neighborhood centers are the most popular type of properties right now. Investors are actively looking to acquire these centers because they are always in demand and consumers need to shop here weekly.

Lifestyle centers are also popular with shoppers who prefer shopping at high-end quality stores that are in their neighborhood and away from the mall. For example, The Grove in Shrewsbury, The Shops at Union Hill in Denville, Tices Center in Woodcliff Lake, and there is a brand new center opening in Chester.

Restaurant sites are still extremely competitive due to the new concepts coming into New Jersey and the continued expansion of existing restaurateurs. For example Red Robin, Cheeseburger in Paradise, Pizzeria Uno, Famous Daves, Fuddruckers and Applebees are all expanding. Fast casual restaurants such as Panera Bread, Baja Fresh, Saladworks, Five Guys Hamburgers, Fatburger, Salsaritas and several chicken wing concepts are also new to the New Jersey market.

Banks continue to look for locations and it’s not uncommon to see bidding wars for locations. HSBC, Washington Mutual, Citibank, Northfork Bank, Commerce Bank, Valley Bank and PNC Bank are just a few that are seeking sites in New Jersey.

Horne: Downtown areas in Central and Northern New Jersey are benefiting from mixed-use developments that include a blend of retail, office and residential. Additionally, those areas designated as brownfields are receiving favorable incentives to be redeveloped. Urban redevelopment is being encouraged and the New Jersey Smart Growth plan is acting as a major driver.

NREB: What types of retail properties are struggling in the New Jersey market? Why?

Lanyard: The only retail properties that are struggling are ones with poor visibility and accessibility. Activity has also slowed at properties in secondary positions or in centers that have not been updated.

Delfiner: Properties that are located in areas generally viewed as being in between strong retail sub-markets tend to struggle more. The majority of retailers prefer the concentration of many retail centers and synergy with other retailers. Properties not near these centers usually have a smaller audience of retail types that will drive their demand. These may be located on highway arterials or be locations in shopping centers where there is not a strong overall attraction from the co-tenants. Older store prototypes with storefronts and limited parking also tend to suffer as retailers want the ease of accessibility to their stores.

Dunkelman: Secondary and tertiary shopping centers have struggled, with several first time property owners needing to work a property to locate quality users.

NREB: What retailers are most sought after in the New Jersey market? Why?

Delfiner: Any strong national, regional or local retailer that can either anchor a center or stimulate interest from other retailers due to their co-tenancy are much sought after. The categories range from supermarkets to medium and large box retailers. It is essential to the economic viability of a retail development to secure anchor tenants to commence planning and construction.

Dunkelman: National chain tenants such as Starbucks and Panera Bread are highly valued tenants along with the big box names like Best Buy, Target and supermarkets such as Wegmans.

Horne: The hot retailers in this region are gourmet grocers. Whole Foods is leading the pack at present, but The Fresh Market and Wild Oats are poised for a full-on assault in this region. Many areas are hoping the cache of a gourmet grocer will serve as the cornerstone for new high-end developments. Christmas Tree Shops is the new retail darling and they appear on site plans for many planned developments.  There is also a host of well established retailers that continue to penetrate the market, including Staples, Best Buy, Target and Wal-Mart, which still holds significant appeal.

NREB: What do you think needs to happen in the New Jersey area in order for the market to improve in 2006 or 2007?

Lanyard: For the market to improve, the economy needs to improve. There are currently new issues in New Jersey that affect consumer’s wallets. For example, gas prices and a higher state sales tax will take more disposable income from consumer’s wallets. Consumers will have to reallocate and prioritize their spending.

Dunkelman: To stabilize rental rates, interest rates need to continue the slow upward trend. In addition, greater momentum in the municipal entitlement process would help several key projects move forward from the approval stage.

Horne: For the New Jersey markets to improve further, the duplicative layers of planning, zoning and permitting need to be eliminated or at least streamlined in order to allow development to occur in an orderly and timely basis. Towns need to realize that they are in the real estate business and the tax revenue created by these new developments help to stabilize the property tax base for residents. Too often the relationship between the municipality and developer is adversarial; thus, a better working relationship between the parties would lead to projects that meet the goals and best interests of all involved.

Famous: For the market to improve further, zoning restrictions on retail development would have to be both relaxed and expedited. Such restrictions have hindered the ability for developers to gain approvals. In New Jersey, in particular, big box ordinances have limited the development of power centers.

NREB: What retail trends do you think will emerge in the New Jersey market in 2006?

Lanyard: Emerging trends include the continued talk of town center developments, mixed-use projects and lifestyle centers. Urban area developments such as Harrison, Dunellen, Bloomfield, Newark and Hoboken will continue. Ties to train stations and access into New York City will also affect the retail market.

Delfiner: Towns that do have a downtown component will focus on ways to commence or complete revitalization efforts. Collingswood is a great example of this. Not only has the activity in the retail sector spurred demand in the downtown area, but there has been a significant increase in new residents wanting to move to the town. Another trend that will continue to evolve rather than emerge is the planning of towncenters for various municipalities. This mixed-use development could see specialized retail, various housing components built around parks and municipal facilities. This should be more prevalent in the growth markets where the municipalities want to create a focus to the township rather than merely planning for highway commercial zones and spot retail clusters.

Dunkelman: Lifestyle users, financial institutions and QSR’s will continue to expand with the potential for an increase in mall tenants to investigate alternative locations.

Horne: The redevelopment trend will continue. Urban centers have the sincere desire to reinvent themselves. Additionally, a de-malling effect is taking place in some enclosed malls. This has resulted from department store consolidation and other competitive reasons. In reaction to this trend, smaller, out positioned enclosed malls have opted to reposition themselves as power centers. For example, both the Fashion Center and the Bergen Mall in Paramus are currently undergoing redevelopment.  

NREB: What are your predictions for the retail market in New Jersey in 2006 and 2007?

Delfiner: The momentum from projects already planned or approved will continue to fuel construction of retail centers. There appears to be continued demand from both retailers and developers to maintain a strong pace of expansion activities.

Horne: The remainder of 2006 and 2007 will remain robust as projects in the pipeline continue towards completion. At this point, prospects for the 2008 market appear good; however, if interest rates continue to rise activity, will level off and new development will slow. Rents will continue to escalate, but not at the same pace as was the case in 2005 through 2006. 

NREB: How would you describe the lending environment for retail properties in the New Jersey market?

Delfiner: Projects that can bring strong creditworthy anchors will continue to have a more favorable lending environment. When there is an overabundance of smaller non-credit tenants that constitute the majority of demand for a center, then the lending requirements will be that much more stringent. The financial strength of the particular developer and the overall project costs will also dictate the level of interest and participation from lending institutions.

Horne: The lending environment is stable and strong. Lenders are still vigorously competing to place money in quality projects at aggressive loan-to-value ratios. The financing market continues to show incredible flexibility and creativity with the growth in TIC (tenant in common) transactions. Many REITs and private equity firms are still transacting their deals on a cash basis.

NREB: Interest rates are expected to rise in the coming year. How do you think this will affect real estate in the New Jersey market?

Delfiner: Naturally one would expect rising interest rates to negatively affect real estate markets. It will depend on the level of increase, the overall economic environment, and how it will affect consumers as well as the specific retailers ability to absorb the increases. It may simply translate to a reduced number of store openings rather than a complete stoppage with expansion plans.

Dunkelman: If rates rise incrementally, the market will be able to absorb the increases; however, should the rate hikes advance more quickly, there may be some repercussions in the market.

Horne: With interest rates rising and historically low cap rates, investors will be more cautious and thorough in their due diligence when assessing an investment opportunity because they don’t want their returns to fall below those of long-term bonds. In regards to development, costs will be higher for construction loans, bridge financing and permanent financing, which will translate into higher rents for tenants and may cause some projects to be delayed or cancelled completely.   

Philadelphia

NREB: Describe the current retail development activity in your sector.

Samtmann: Retail development activity in eastern Pennsylvania continues to be strong with many new projects ranging from ground-up construction to redevelopments. The continued residential growth has spurned several emerging markets in the area. Retailers are also moving within existing markets to locations they perceive as better in order to enhance or out position competition and allow for their newer prototype. Developers are finding that construction costs are rising at a notable rate, which have caused rental rates to rise. However,  their creativity, entrepreneurial spirit, intelligence and relationships with tenants have all helped to make their projects successful. The Philadelphia market is very mature. Therefore, many new projects are born via redevelopments rather than from raw ground. These retail developments are being constructed on the sites of old retail centers or non-retail sites such as industrial or office properties. One example would be Goodman Properties’ Willow Grove Point. Goodman took an industrial facility and redeveloped it into a new center anchored by Lowe’s and Sam’s Club. This project has helped to stretch the Willow Grove Market further east along Welsh Road, the main thoroughfare through the market.

Bonnani: There has been steady retail development in both the southern New Jersey and Chester County, Pennsylvania markets following the explosive housing growth in these sub markets. The balance of the markets will see more of a focus on in-fill retail development, redevelopment of existing strip centers and the continuing emergence of transit village or town center concepts.

Soloff: Retail development has been  active with a number of new large projects coming online; however, the incubation period from conception to entitlement is taking longer, which is beginning to constrain new development.

NREB: How would you characterize retail leasing climate in your area this year?

Samtmann: If a property is in a strong or noticeably growing market, then leasing activity has been historically strong. The opening of new stores is an  important component to increasing overall sales for retailers and restaurants from year-to-year; therefore, the retailers are still striving to expand. The increase in gas prices seems to have had a modest effect on consumer spending.  Therefore, retailers are still expanding and opening new stores.  Even in a positive market, developers must be conscious of increased construction costs and lower returns. 

Gartner: Retail that continues to flourish is the very big and the very small. Large format discount stores, such as Target and Wal-Mart are continuing an aggressive expansion strategy. Home improvement retailers and wholesale clubs also continue to thrive. Supermarkets, after years of rapid expansion, appear to be following a limited growth track, as they deal with chain-wide issues and fierce competition from other non-traditional grocery sellers. Restaurants are constantly and aggressively expanding. Quick casual dining concepts remain the most prolific category, fueled by aggressive franchising to either individuals or to master franchisees that have regional territories.

 NREB: How would you describe the investment sales activity in your area?

Bonnani: Investment sales activity has been aggressive for properties coming to market at realistic price levels based on current or stabilized income, often generating multiple competitive offers from investors on quality multi-tenanted assets. A potential slowdown in the sale of single-tenant net leased properties appears likely due to the last 2 to 3 years of great price per-square-foot appreciation, cap rate compression and excess supply of property coming to market.

Gartner: Even with interest rates creeping upward, there is still a voracious appetite by the investment community to acquire strategically located centers throughout the area. Sellers will continue to benefit from this extraordinarily bullish market for the foreseeable future.

Soloff: The investment sales market has cooled somewhat due to a combination of limited product and cap rates make little sense. Currently, larger national and regional REITs are buying the most significant product. 

NREB: Do you think any particular markets (or submarkets) in Philadelphia have grown in the past year? Which ones and Why?

Samtmann: Emerging markets in Philadelphia are the suburbs of Allentown/Bethlehem/Easton, Limerick, Royersford and western Chester County, such as Chadds Ford/Concordville and Jennersville. Warrington is already a mature market, but new projects continue to change the landscape.

Bonnani: Gloucester, Salem, and Burlington County in southern Jersey as well as Chester County, Pennsylvania have certainly grown in the past year.  Retailer sales, retail development and leasing follow expanding demographic data in terms of housing starts, median household income and traffic or transportation patterns.  These four markets rate highly on all factors and should see continued growth over the next 2 to 5 years.

Gartner: Center City, for the most part, is fully-leased with a few small exceptions. The only way for new retailers to find sites is to buy-out the leases of underperforming retailers that are sitting in prime locations.

Soloff: Due to available land, residential development and a strong corporate base, there have been several new centers opening along the US-422 Corridor in western Montgomery County from Trooper to Pottstown. The Stabler-Saucon Valley area in Lehigh County is also experiencing an upswing in retail development. Warrington, in central Bucks County, has a major lifestyle center under construction. 

The retail base in Philadelphia has been revitalized with the expansion of the city’s population base. Upscale retailers, such as Zara and Cole Haan, that had not previously considered Philadelphia, have recently opened stores. There have also been opportunities for department stores in the city. Macy’s recently opened in the former Lord & Taylor store on Market Street and a high profile New York retailer is considering a Rittenhouse Square location. In addition, there is brownfield development planned in several areas in Philadelphia County, particularly in west and southwest Philadelphia.

The area’s major universities have been magnets for retail development as well. Following the success of shopping areas at Temple and the University of Pennsylvania, a shopping center is planned at LaSalle University and the Shops at Villanova recently opened.

Famous: In southeastern Pennsylvania, several markets have experienced growth. In Montgomery County, the Route 422 Corridor (the 19-mile stretch from King of Prussia to Pottstown) has experienced explosive growth with several new projects coming on line. This area has benefited from strong demographics and a growing population. Additionally, areas within central Bucks County (Warrington with the development of Valley Square), and Concordville and Newtown Square in Delaware County are experiencing significant growth and activity.

Emerging growth areas in southeastern Pennsylvania include Oxford in Chester County and Exeter in Berks County. There are a number of power centers either under construction or planned in these areas. 

NREB: What Philadelphia retail markets (or submarkets) are struggling? Why?

Gartner: There is some overbuilding in a few suburban markets where everyone already has found a home  and there are some boxes hoping for retailers to come to them. However, compared to the rest of the country, this is relatively minor. These areas include portions of Exton and Warminster in Pennsylvania, and even some of Cherry Hill’s older boxes and centers. 

Famous: In Pennsylvania, both Manayunk and Chestnut Hill have passed their prime in terms of explosive growth. Though these areas are still vibrant retail hubs, they do not hold the appeal they did several years ago. Factors such as shifting demographics, flat residential growth and parking constraints have played a role.  In addition, the explosive residential growth combined with increased retail offerings and cultural amenities in Center City have further hampered the vitality of Manayunk and Chestnut Hill.

NREB: What types of retail properties are popular in the Philadelphia market? Why?

Samtmann: Power centers anchored by big or junior box, national credit tenants are very popular right. Lifestyle centers with high-end national tenants and grocery anchored retail centers with national credit tenants are also a big trend. The grocers, however, will need to be the newest prototype size and design.  Bank and drug store sites are also hot in the Philadelphia market right now.

Bonnani: On the investment side, in most sub-markets, strip centers with value-added potential are in great demand as long as the entire retail marketplace hasn’t moved a few miles away into the new power/community shopping center, which can often take all of the customer traffic and sales with it.

Soloff: Lifestyle centers are the hottest property from a development standpoint, while grocery anchored neighborhood centers are in the highest demand from investors, particularly national REITs vying for market share. 

NREB: Are there any particular property types that are struggling in the Philadelphia market? Why?

Samtmann: Retailers such as Ames, Kmart, Levitz, Gateway Computers, Tweeter, Burlington Coat Factory, and Weis Markets have closed their doors at a number of locations. Retailers including Home Depot, Giant, IKEA, and Genuardi's have abandoned smaller non-prototypical locations for new developments and larger stores. In many cases, the spaces and properties left in the wake of these retailers have struggled to find replacement tenants. 

Bonnani: Older centers with poor access ingress and egress, small width and depth shell design and many of the original Main Street retail areas are struggling right now.  Sites having outdated design or which incur negative economic factors will continue to struggle and lose value until the property is redeveloped or a re-adaptive use is undertaken.

Soloff: Smaller, unanchored strip centers with mom and pop tenants are struggling to compete because of limited customer traffic and a longer lease-up time for vacancies.

Famous: Smaller supermarket anchored centers are struggling. As supermarkets reposition themselves to large store formats, they are leaving their existing spaces vacant. As a result, other tenants in the center can suffer as a major draw has been eliminated.

NREB: What retailers are most sought after in the Philadelphia market? Why?

Bonnani: In the developing south Jersey submarkets, larger power centers will find land available in Gloucester and Salem counties. These centers will include your typical big box retailers such as Target, Wal-Mart, Kohl’s, Home Depot, Lowe’s and Circuit City. Neighborhood or community centers will favor the traditional grocery anchors with a minimum of 65,000 square feet with one or two additional midsize regional/national tenants and pads for the maximum coverage combinations of credit rated tenants, including drug stores, banks, and or restaurants. For example, Stop N Shop, Acme and Shop-Rite stores. 

Gartner: Mega-box anchors and small national merchants, especially food and bank uses are the most sought-after categories. These same retail categories will continue to flourish, as they are the hot retail categories in this market. Most of the junior anchors in categories such as electronics, housewares, sporting goods, and books have already penetrated this market with their stores, and they are focusing much of their expansion on other parts of the country where retail development is following population growth.

Famous: Traditional power center big box anchors like Target, Wal-Mart, and Kohl’s are still very active and can make or break the success of a new development. On the other hand, as lifestyle centers gain momentum, smaller box retailers like Banana Republic, Anthropologie, Z Gallerie and Apple are considered highly sought after commodities.  Eateries like Panera, PF Chang and Chipotle, among others, are very desirable and attractive additions to these specialty centers, as well. 

NREB: What do you think needs to happen in the Philadelphia area in order for the markets to improve in 2006 or 2007?

Samtmann: Consumer spending needs to remain strong and construction costs stable.

Bonnani: For new and/or redevelopment projects there needs to be a drop in the never ending increases of both soft and hard costs for these projects.  There also needs to be a continued effort in the redevelopment/re-adaptive mixed-use of existing retail properties and our urban centers. Zero rate increases through the end of the year would be beneficial, especially to let the prior 17 take effect. The repeal of the New Jersey 1 percent state sales tax increase and mandate a balance state budget prior to end of fiscal 2007 would also trigger market improvement.

Gartner: Interest rates and costs associated with construction and energy will be major deciding factors in the upcoming months. Also, retailers and developers need to stay on the same page regarding their economic expectations.

Soloff: The retail market has been consistently strong, so maintaining the current momentum is the priority. The main impediment to the market is the increasingly cumbersome zoning and entitlement process for new development, which is not likely to ease. 

NREB: What retail trends do you think will emerge in the Philadelphia market in 2006?

Samtmann: Mergers and acquisitions will grow in popularity since there are so many competitors in many retail categories. Many competitors are often vying for a finite number of new sites, and retailers are therefore turning to mergers and acquisitions as a method to grow in order to satisfy Wall Street or private investors.

There is a growing trend of mixed-use developments that incorporate office, residential and retail.  Examples would include the projects planned for the former Valley Forge Golf Course in King of Prussia and the former Worthington Steel facility in Malvern. The retail will enjoy a built-in customer base with the office and residential in close proximity to the stores. These types of projects most often are best suited for large tracts of land where the three uses allow for the most efficient use of the property.

Gartner: Some retail categories will continue their consolidation, most notably video and music stores. We’re also seeing some slowdown in mattress stores, a category that has driven up outparcel prices. Bank deals are becoming more prevalent, and the prices they’re paying are going through the roof.

Soloff: With advent of legalized gambling in Pennsylvania, the areas around the approved slot parlor sites will be open to additional retail development.

NREB: What are your predictions for the retail market in Philadelphia in 2006 and 2007?

Samtmann: Constructions costs will continue to be a topic of great importance; however, developers will likely continue to redevelop properties for retail use in mature markets. Considering the strength of the market, retailers will continue to expand and new concepts will enter the region. Should the environment shift to a buyers market, the region has shown the resiliency and strength necessary to adjust, excel and prosper. 

Bonnani: The short-term forecast for the Philadelphia market is for modest job growth, an 8 percent to 10 percent increase in retail square feet construction, stabilized vacancy rates ranging from a low of 4 percent in the Southern New Jersey sub-markets to a high of 15 percent in urban markets with 7.5 percent being a market norm. Asking rental rates will continue to rise as will effective net rentals, as much as a 3 percent to 5 percent increase, reflecting the increase cost to owners of construction and utilities. Nominal inflation cap rates will continue their modest rise through the end of the year, reflecting rates between  7 percent to 8.25 percent, depending on the type of center, location and credit worthiness of the tenants. The rising rental rates and cap rates will work opposite sides of the investment spectrum, resulting in little price fluctuation from the current closed price per-square-foot of $125 to $155 for retail centers and $325 to $525 for single-tenant investments.

Gartner: Most new deals will be extremely difficult and expensive because they will be on dense, in-fill sites.  However, retailers find this market incredibly desirable from a demographic perspective, so they will continue to seek expansion here.

Soloff: Development will continue to follow the high growth residential corridors in Bucks and western Montgomery counties. There will be additional infill redevelopment sites underway, particularly in Philadelphia, King of Prussia and in Chester County. Hopefully, inflation will remain in check and high fuel prices will not impact consumer spending.  

Famous: There will continue to be a surplus of retailers looking for space. As such, rents will continue to rise across the board for preferred areas. Fameco expects this trend to continue for several more years. Already, the retailers that Fameco represents are securing their positions for 2008 deals.

NREB: How would you describe the lending environment for retail properties in the Philadelphia market?

Samtmann: There are more than enough lenders willing to supply the capital necessary to buy properties.  Unfortunately, there isn't enough property to buy.

Bonnani: Despite the recent rates changes, rates are still reasonably attractive based upon long-term historical averages.  Thus, rates, terms and conditions are all reasonably available for retail property borrowers.

Soloff: Retail is a sought after investment and there continues to be numerous sources of private and public money available.

NREB: How do you think rising interest rates  will affect the real estate in the Philadelphia market?

Samtmann: Demand will remain high for retail properties considering the quality of the real estate and demographics in the region. Buyers will likely be more cautious when purchasing a property because the returns may not be as high as they have been over the last few years. 

Bonnani: As has been reflected in the housing market this year, owners whose properties are on the market for a long period of time, may face minor reductions in asking price or fewer buyers then in previous negotiations. With much of the commercial underwriting of debt based on the 10-year Treasury at 70 percent or less loan-to-value, the likelihood of substantial problem loans has been removed from the equation.                  

Soloff: While there will be some pent-up demand for acquisitions, we anticipate that sale prices and cap rates may begin to stabilize. 

Famous: The rise in interest rates will have little impact on investment activity. Owners will continue to realize the value of their properties; however, they may still consider selling as opposed to long-term holds. REITs, which control a significant portion of the retail product, will be affected very little by the rise in rates.

Garden State Park Garden State Park includes a 530,000-square-foot regional shopping center known as Market Place at Garden State Park. Garden State Park is a $1 billion mixed-use mega-complex situated on 226 acres located off the northwest corner of Route 70 and Haddonfield Road in Cherry Hill, New Jersey. This site, which is the former Garden State Park race track was a unique opportunity for the owners to combine their knowledge and talents and put together a landmark development addressing the community’s needs of open space combined with upscale living, a convenient place for shopping and dining and a “downtown” setting. The project will create more than 3,000 jobs, and will address open space, safety, convenience and comfort. Garden State Park includes a 530,000-square-foot regional shopping center known as Market Place at Garden State Park, which will include Wegman’s, Home Depot, Bed Bath & Beyond, Christmas Tree Shops, Best Buy and Dick’s Sporting Goods. The project also contains a 230,000-square-foot lifestyle center known as Towne Place at Garden State Park, which will include The Cheesecake Factory, Barnes & Noble, McCormick & Schmick’s Seafood, Jake’s Steakhouse, Brio, Talbot’s, Coldwater Creek and J. Jill. The residential component will contain approximately 1,700 luxury rental units, including townhomes, condominiums, and rental apartments.  Plus, approximately 1 million square feet of office space, and a 150-room hotel.  The complex features a 10-acre park with an amphitheater, three ball parks, a trolly system that is reminiscent of the old San Francisco street cars and transit access to Philadelphia. Market Place is just completing construction. The anchor stores are open and all other phases in this portion of the project should be complete by first quarter 2007. Towne Place is under construction with Cheesecake Factory open for business while all other buildings in this portion of the project should be complete by the final quarter of 2007. The residential components should be complete beginning with the first quarter of 2007 and finishing by final quarter 2008.  The office/hotel component schedule is not complete, but a reasonable estimate for this phase is 2009. Companies involved in this project include JMP Holdings Corp. and Edgewood Properties.

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