Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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29 May | June | 2014 CCIM.com by Beth Mattson-Teig Although the retail sector is beginning to recover, the sector still faces daunting challenges that are impeding the return of new construction. Some of the factors squeezing the development pipeline include excess space that continues to hang on the market, lackluster rent growth, and more-stringent fi nancing requirements. Owners have been working to backfi ll empty space. Yet there continues to be dueling forces in the industry with the moderate demand for new space at odds with continued store closings. Major announcements in fi rst quarter included Radio Shack's plan to shutter 1,100 stores and Staples' intent to close 225 stores. Although vacancies among neighborhood and community centers declined slightly to 10.4 percent at the end of 2013, they remain elevated compared to 2008 levels when vacancies were at 8.9 percent, according to Reis. One of the challenges is that construction costs have risen in the last couple of years, while rents have increased very little over the past few years. In fact, effective rates for neighborhood and community centers that averaged $16.83 at the end of 2013 are just 8 cents above 2009 levels, according to Reis. So, it is a challenge for developers to get the rents to cover the higher construction costs and still make a reasonable return. "Our development pipeline is fairly active right now, but only because there has been some tenant requests for space," says George C. Larsen, CCIM, a partner at Larsen Baker Development, Brokerage & Management in Tucson, Ariz. "We feel that many tenants fi nd it diffi cult for them to make money at the rents it requires, because new construction is expensive," Larsen says. In Tucson, for example, it is diffi cult to do new construction without collecting rent above $20 per square foot per year net. "That is hard for a lot of merchants to pay," Larsen says. In addition, tenants can go down the road and fi nd an existing, 10-year-old shopping center that they can get for $12 psf, he adds. National restaurant chains and service businesses such as spas and yoga studios have proved willing to pay top rents. But, apparel retailers and local restaurant operators still have a very diffi cult time justifying those higher rents based on current sales, he adds. "In terms of new junior box development, we need the tenants that occupy that category to come to terms with the economics of new construction and the rent required to make the deals pencil for developers," says Chris Moe, CCIM, a partner at H.J. Development in Wayzata, Minn. "The days of desperate landlords are over and the deals they struck cannot be duplicated in a new-construction scenario." In addition, that same group needs to gain a better understanding of the impact that kick-out clauses, co-tenancy requirements, and caps on common area maintenance charges have on a developer's ability to obtain fi nancing for a project, he adds. Obtaining construction fi nancing is another challenge. Lenders are typically looking for pre-leasing commitments for retail projects of about 75 percent. "The fi nancing is such that you still have to have signifi cant pre-leasing to get a project out of the ground if you are using bank debt," says Moe. ttson-Teig l sector is beginning to recover, the nting challenges that are impeding not willing to pay the higher rents that you need to justify ground-up development," Moe says. Bringing in mixed-use components such as clinics or dentist of ces also has helped to anchor new retail projects. H.J. Development cur- rently is working on Woodbury Plaza, a 15-acre mixed-use develop- ment in suburban Minneapolis-St. Paul. T e f rst phase of the project will feature an 18,000-sf medical of ce building, a 6,000-sf free- standing credit union, and two 7,000-sf multitenant retail buildings. Still Following Rooftops T e current pipeline of retail projects runs the gamut from New York and Miami to Fayetteville, N.C., and Boise, Idaho. So how are those markets and submarkets attracting that growth? Certainly, urban in-f ll projects have been a hot ticket as retailers look to get a foothold in markets with strong demographics. T e old adage about retailers following roof ops continues to be a key factor for expansion deci- sions. Retailers are targeting population and household growth, and they are attracted to markets with stable and growing economies. Fayetteville is one market that has several large retail projects that are either already under construction or proposed. "Over the past 18 months, there has been a very noticeable pick-up in the demand for retail space and the interest from developers in building in this mar- ket," says Patrick Murray, CCIM, CLS, owner and broker in charge at Grant-Murray Real Estate in Fayetteville. Fayetteville is home to Fort Bragg, which is one of the largest mili- tary installations in the world. Over the past several years Fort Bragg 2 6 - 3 1 F - R e t a i l P u s h - T i e g _ A l t . i n d d 2 9 26-31 F-Retail Push-Tieg_Alt.indd 29 4 / 2 9 / 1 4 2 : 4 9 P M 4/29/14 2:49 PM