Participants at the ICSC New York Conference this week were waxing optimistic for the retail real estate industry going forward. Indeed, research consultant Dana Telsey told conferees that the phrase she heard most often at third-quarter earnings meetings with the executives of nearly two dozen retail chains was, “It feels better.” Telsey, who heads Telsey Advisory Group, pointed out that though national unemployment figures are skyrocketing, only about 5 percent of college-educated workers are currently unemployed.
“There’s a lot of money still out there,” Telsey said. Consumers are buying more home furnishings, jewelry and recreational vehicles — leading indicators of more-pervasive sales growth — and sales of discretionary items are beginning to outpace those of staples, she said.
Furthermore, the field is set for an increase in rental income and occupancy at shopping centers over the next few years, now that retailers are seeing healthier balance sheets and focusing on top-line growth, said ICSC Chairman William S. Taubman.
Toys ‘R’ Us is among those that are back in growth mode. “We’re here to make deals,” said David Picot, the toy chain’s senior vice president of property development. Toys ‘R’ Us is seeking sites for its Express pop-up stores, which offer a smaller selection of wares during the holidays. The company opened 90 of these in 2009 and then decided to keep a third of them open year-round after seeing the sales results. “We’re hoping to keep a bunch of the ones we open this year as full-time stores after the holidays too,” Picot said. “We’re in talks with lots of landlords to make that happen.”
Representatives of such growing chains as Dollar General and PetSmart were among those participating in the conference’s Retailer’s Runway.
Taubman said the industry owes thanks to the Federal Reserve for the burgeoning recovery. “The Fed’s helping by keeping interest rates low, which helps keep cash flow high at properties and allows banks to extend and modify loans,” he said. “We should all thank Bernanke.”
There was energy in the meeting booths, too, in contrast to the relative quiet there last year. WS Development has emerged strong from the recession and is looking to invest $500 million in distressed properties, said David W. Fleming, the firm’s director of corporate marketing. “We’re seeing things improving for sure,” he said. The firm is also moving ahead with a scheduled 2011 ground-breaking for its Market Street at Lynnfield (Mass.) mixed-use center. In addition, the firm is planning a 1.5 million-square-foot retail component for Seaport Square, a 6.5 million-square-foot multiuse project it is developing with Gale International and Morgan Stanley Real Estate on the South Boston waterfront.
The conference drew some 6,000 executives from around the world.
Cash-flow analysis key to deal making
Vacancy and rental rates remain important measures of a retail real estate deal’s viability, but the financial turmoil of the past few years demonstrates the need to incorporate cash-flow analysis as well. “It’s a different set of information,” said Robert White, president of Real Capital Analytics. “Mostly, data points are about location, location, location — especially for retail: What’s the growth corridor for this suburb? What proposed developments are going to affect rates and vacancy in a particular center?
“It’s very much market-centric. With capital markets, you are talking about national, if not international, sets of influencing factors that do impact pricing and liquidity of real estate.” Experts point to the NCREIF index, which tracks the income and appreciation performance of income-producing properties. Over NCREIF’s long history, the income component has been steady or flat, but the appreciation side, driven by capital flows, vacillates. “The volatility is on the capital side,” said White. “Cap rates are low, cap rates are high; there are buyers, there are no buyers. That’s the volatility, which is really the risk.”
Capital flows move quickly and can end suddenly, which is what happened when the commercial-mortgage-backed-securities market came to a grinding halt following the blowup of the residential mortgage market in 2007. “When I work with the Federal Reserve, that’s what I always talk about: capital flows,” said Chris Macke, a real estate strategist at CoStar Group. “If you look at real estate boom-and-bust cycles, the problems are never about the income levels properties are producing; it is always the capital flows. People are so focused on location, location, location, they forget timing, timing, timing — where we are in the capital flow cycle.”
CB Richard Ellis Econometric Advisors focuses mainly on fundamental forecasts — availability and rent. Still, said CBRE economist Abigail Rosenbaum, “we certainly can’t escape looking at cap rates, transactions and volume. From our perspective, it’s important to incorporate as many variables as you can.”
Though a lot of companies produce excellent data on vacancy and rental rates, there are not a lot of researchers reporting cash-flow data points. This does not mean that industry professionals are unaware of what is going on, but some cynics might say that it is in their individual interest to ignore the wider picture. “No one is getting paid to pay attention to cash-flow cycles,” Macke said. “If I have a choice between continuing to do deals and make money — although the deals will go bad and I will have no consequences for it — and stop doing deals, stop making money and getting fired, I’m going to choose the former.”
Report: D.C. still the capital of U.S. retail investment
The District of Columbia will be the top market for retail real estate investment in 2011, followed by New York City and San Diego, according to Marcus & Millichap. Better-than-average employment growth, higher income levels and lower vacancy rates will help draw investors to these markets, the firm says. Los Angeles and Orange County round out the top five markets in the firm’s index. The retail markets in these regions benefit from supply constraints that suppress vacancies and push rents up. Investors should also look at Texas, the firm says. Houston, San Antonio and Austin topped the list of markets with highest expected job growth, in that order. On the other end of the jobs-growth scale are Fort Lauderdale, Fla., Cincinnati, and Oakland, Calif.
Ohio will have the most vacancies in 2011, says the firm, with Cincinnati and Cleveland being chief among the cities in that category. By contrast, California’s retail centers will probably stay relatively well tenanted; San Francisco, San Diego, San Jose and Orange County all placed among the 10 markets expected to post the lowest rates of vacancies for the year. Meanwhile, the most dramatic declines in investment levels will probably occur in Indianapolis and in New Haven, Conn.
Casino to give Maryland mall a boost
RETAILING TODAY
Yum Brands says it aims to double its KFC store count in Africa to 1,200 by 2014. The chain, which operates about 600 restaurants in South Africa, will enter Angola, Ghana, Nigeria and Zambia.
White Castle launched three fast-casual concepts operating inside remodeled White Castle units: Blaze Modern BBQ, in Lafayette, Ind., offers slow-cooked barbecue; Deckers, in Lebanon, Tenn., is a grilled-sandwich shop; and Laughing Noodle, in Springfield, Ohio, specializes in noodles, soup and salad.
Applebee’s owner DineEquity says it will sell 30 restaurants in the Washington, D.C., market to Potomac Family Dining Group for $27 million in a deal set to close in the new year.
Costco says that of its 10 highest-volume stores, eight are in Asia.
Talbots’ 27 outlet stores posted about $500 per square foot on average in the third quarter.
TRANSACTIONS
Vestar Development and Rockwood Capital bought Tempe (Ariz.) Marketplace, a 1.3 million-square-foot regional mall, from DLJ/Credit Suisse for $280 million.
A unit of Inland American Real Estate Trust bought a majority stake in 25 shopping centers, totaling 4.5 million square feet, from Centro Properties Group for $161 million. The companies lined up a collective $310 million mortgage on all but one of these centers from Goldman Sachs and JPMorgan Chase. Centro will continue to manage the properties.
A New York City investor paid PACE-Beacon Hill $10.6 million for a 14,469-square-foot Walgreens in Alexandria, Va.
THE COMMON AREA
Westfield shareholders approved the formation of Westfield Retail Trust, a spinoff that will serve as a 50 percent joint-venture partner with the REIT in its 54 Australia and New Zealand shopping centers.
Oslo, Norway, is the world’s most expensive city for shopping, according to PriceRunner, a research firm.
Six out of 10 American shoppers provide gift receipts along with the tokens of their holiday largesse, says the National Retail Federation. According to an NRF survey, 60.7 percent of respondents said they provide a gift receipt most or some of the time. That’s up from the 58.5 percent who said so in last year’s survey. Nearly 90 percent of the respondents said they found stores’ return policies to be fair.