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FEATURE Still Some Opportunities in Crowded Northeast by Nick ’Amore The retail real estate pulse remains strong and steady in the Northeast. Rents stayed the same or have increased this year for most shopping center owners and leasing agents in the Northeast. The Dealmakers interviewed some national chains “off the record” about their stores in the Northeast and the response was that some national chains and certain retail categories are experiencing major downturns in the market. Bankruptcy filings are on the rise with a wave of corporate bankruptcies expected in the next year or two. At the same time, real estate developers are bringing new retailers into the Northeast market, which is always the best testament that a market is viable.
Developers and brokers see the Northeast market as remaining profitable, with most doing more deals in 2006 compared with 2005. But some foresee a potential downturn in coming years as developable space becomes increasingly precious and rare. Good locations are especially hard to find in New Jersey and New York where high density has contributed to a lack of space, according to Richard Beyda, vice president of Jembro Stores, Inc., a 20-unit chain of general merchandise stores in the Northeast. “Quality space is always at a premium,” he said. “The market is more competitive than it’s ever been.”
Of course Manhattan, New York is the queen of retail and no part of the country can match the population density of New York City and the outer boroughs. As the area with the most dense retail development in the Northeast, New Jersey seems to represent the positives and negatives of the marketplace: Affluent demographics, but little space left to build, leading to higher rents. The dearth of space in New Jersey has caused developers to alter their building strategies in the area, according to Steven Gartner, president of Metro Commercial Real Estate, Inc., a New Jersey-based full-service firm with a leasing portfolio of 190 retail properties in New Jersey and Pennsylvania. Gartner sees the New Jersey market slowing down as the area is saturated with traditional development. Numerous progressive mixed-use developments, however, are in the planning stages. According to Gartner, retailers and landlords are embracing mixed-use and planned communities as people look for alternative lifestyles to the suburbs or major metropolitan areas.
New Jersey’s strong demographics make the state one of the most viable markets in the country, according to Chuck Lanyard, principal and director of brokerage services at The Goldstein Group, a New Jersey-based full-service retail brokerage firm representing eight million sq.ft. of retail space and numerous tenants. With a low number of vacant spaces, competition is fierce and retailers are quick to populate any spaces that do become available. Activity continues throughout the state, with new retailers coming in and existing retailers expanding. “National retailers are still aggressively seeking locations in New Jersey and available retail store space is still very limited,” Lanyard said. “Even if the economy slows and vacancies become available, New Jersey’s absorption rate will be high due to its desirability.”
Rents and sales figures are stable or rising in many Northeast regions, according to retail real estate professionals. Thomas Mirandi, vice president of real estate at RD Management, LLC, believes that there will be more deals in the Northeast in 2007 as the market will stay strong. He sees rents rising and expects a 20% increase in construction costs next year. RD Management is a New York-based privately held real estate development and management organization with a portfolio of more than 200 shopping centers in the U.S. and Puerto Rico. Gartner said rents rose in 2006, particularly with banks and pharmacies, because of a lack of supply. “Overall, that lack of supply is extending throughout the real estate market, pushing rents up higher at a rate which exceeds CPI,” he said.
William B. Hesse, president of Aries Deitch & Endelson, Inc., disagrees, saying there was more activity in 2005 compared with this year, as landlords were not getting the prices they had previously. Aries Deitch & Endelson, Inc. is a New York-based full-service brokerage organization specializing in shopping centers and downtown retail real estate in Connecticut, New Jersey and New York. “The stable or higher rents being demanded by landlords are meeting resistance by the retailing industry,” Hesse said.
Though they are expanding and achieving good sales numbers, retailers are negotiating harder in terms of CAM charges. Completing deals is taking longer, as retailers and landlords hammer out details on tenant improvements, exclusives and kickouts. According to Philip Hatch, vice president of Edgewood Properties, Inc., a New Jersey-based developer with a portfolio in excess of 30 commercial properties, the issues coming up mostly are capping CAM charges and exclusives. “It’s not necessarily harder, but deals are taking forever,” he said.
Principals at Levin Management Corp., a New Jersey-based property management firm with nearly 12 million sq.ft. in its portfolio, say dealmaking has become more difficult as well, particularly with national retailers due to retailer consolidation. In particular, the national retailers are getting tougher in lease negotiations with regard to their exit strategies. Chains are especially looking for broad assignment rights and changes of use, the principals say.
The process also is taking extra months to complete with mid-sized and large-sized companies, according to Michael Gartenberg, director of leasing for Garden Commercial Properties a New Jersey-based developer with a portfolio in excess of 25 million sq.ft. He said leases are increasingly detailed with new issues arising that had not been addressed in the past. “Everyone is looking to pass the risk and the cost, however small it may be, to the other party,” Gartenberg explained. “You eventually come to some common ground, but it is definitely taking two extra lease drafts to get there.”
In some instances, the desire of a retailer to set up shop in a good market can make the negotiations that much easier. Scott Lifschultz, executive vice president of GVA Williams of Connecticut, which provides brokerage services for tenants, landlords and investors, said tenants are actually more flexible with lease issues now than they had been. “Westchester and Fairfield counties in Connecticut are very difficult markets to penetrate,” he said. “So, if an opportunity arises, tenants must be flexible.”
Similarly, Lee Cherney, senior vice president of Kin Properties, a Florida-based owner of single-tenant properties with a national portfolio exceeding 30 million sq.ft., said haggling over details is more frequent with sites that are not in high quality locations. “An ‘A’ location that a tenant needs doesn’t get heavily negotiated, but a ‘C’ location where the landlord is in need gets heavily negotiated,” he said.
Developers and leasing agents said they are negotiating more with brokers in their real estate dealings. Many retailers have reduced their in-house real estate departments and now rely mostly on their brokers, according to Andrew LaGrega, principal of leasing and marketing at The Wilder Cos., a Massachusetts-based retail real estate development, management and leasing firm with a portfolio of 31 retail properties. Though, developers and leasers have adapted, LaGrega said brokerage fees should be standardized or added to the final rent negotiated. “We have finally learned to embrace the brokers as we could not be successful without them,” he said.
Lifschultz believes that the outsourcing of real estate to the brokerage community is a change that will continue in coming years. In addition, he has experienced more brokerage firms incorporating a team approach, which can make the process more complex. But with the right team, he said the process could go smoothly. There are, however, instances where unreasonable demands by either the retailer or the landlord must be addressed. Gartner offered examples on both sides, with tenants paying more fees as landlords pass down administrative and management costs to the retailers and some tenants, for their part, being resistant to liability insurance and firm commencement dates. Topping the list of unreasonable demands was a request from a tenant to build out their store with reduced rent the first year, followed by a kickout in the second year of a five-year lease.
Though he did more deals in the area this year compared with last year, Jerry Welkis, president of Welco Realty, Inc. believes that the market in the Northeast will start to slow down in 2007 as higher construction costs lead to higher rents. Welco is a New Jersey-based brokerage company with more than 50 retail sites actively being leased and a bevy of retailers in its tenant-representative portfolio throughout Connecticut, New Jersey and New York. “Also, the cost of real estate is too high,” he said. “Many of the centers being purchased at 6% and 7% will [actually show a] 3% and 4% return.”
Cap rates and construction costs in the Northeast are all on the rise, said Cindy Lindrose, a broker with Zamias Services, Inc., a leasing and management firm based in Pennsylvania with nearly 50 properties in its portfolio. She believes that developers will be engaging in more mixed-use projects and foresees a 6% to 8% rise in construction costs in 2007 compared with this year. Tony Vita, president of Vita & Vita Realty, a New Jersey-based owner of more than 40 properties, said rents are stable for existing retail centers, but are rising high for new developments. “In Fairfield, N.J., we received multiple offers above our asking rent,” he pointed out. Rents are rising in certain areas of Connecticut, as well. Lifschultz is seeing rent increases in higher end suburban downtowns such as New Canaan and Westport. P. Craig Way, vice president and director of leasing of HB Nitkin Group, a New York-based owner and manager of more than one million sq.ft. of institutional grade properties in Connecticut and New York, said rents have risen in Fairfield County and in the better parts of the Hartford area, including West Hartford and Glastonbury. Sales in the better locations are rising as well.
New retailers are starting to enter the Northeast. The Goldstein Group has done deals with Five Guys Burgers, Massage Envy, Golfsmith and I Sold It On Ebay. HB Nitkin is bringing Butterfly Life, a health fitness chain geared toward women, to the Northeast. Salsarita’s, a Mexican restaurant, will be entering the Northeast. Edgewood Properties noted several companies new to the Northeast, including Pot Belly, Pei Wei, Moe’s, For Eyes and Cheeburger, Cheeburger. Levin Management Corp. brought Salt Creek Grille to Princeton Forrestal Village in West Windsor, N.J. as the chain’s northeastern debut. There are several exciting projects of note throughout the Northeast, including Adriaen’s Landing in Hartford, Conn.’s Front Street district; Xanadu in East Rutherford, N.J.; the redevelopment of the former Garden State Park site in Cherry Hill, N.J.; Edison Towne Center in Edison, N.J. and Bergen Town Center in Paramus, N.J.
The 30-acre Adriaen’s Landing site includes the new Connecticut Convention Center and Downtown Marriott Hotel, as well as The Connecticut Center for Science and Exploration combined with a residential/retail district and entertainment district.
Xanadu, being developed at the Meadowlands Sports Complex in East Rutherford, N.J., is a 4.8 million sq.ft. family entertainment, sports, retail, office and hotel complex. The project will include interactive entertainment venues, fine dining, outdoor amusements, runway fashion shows and America’s first Snow Dome for indoor skiing. The site will also offer a luxury hotel and Class A office buildings.
The Meadowlands is located within five miles of New York City, N.Y. Opening date is slated for 2008.
The Mills Corp. in partnership with Mack-Cali Realty Corp created Xanadu. Mills suffered a major setback recently when the Securities and Exchange Commission launched an investigation into the company’s accounting and Mills has delayed filing several reports. Reports indicate that the price tag for Xanadu has almost doubled to $2 billion. Most recently, the company was mulling an offer from Gazit-Globe, an Israeli-based real estate developer, to buy about $1.2 billion in Mills stock. Having already invested $380 million into the project, Mills has begun selling properties to increase shareholder value. This year, the company has sold $981 million worth of properties. For its part, Mack-Cali decided last month to sell its stake in the initial phase of the Xanadu project to Colony Capital, which is reportedly buying out Mills’ larger share of the project in a $500 million deal announced during the summer. “The Xanadu project is the most interesting, assuming it is developed as planned,” Mirandi said. “I don’t know how many more of those kinds projects we’ll actually see.”
Town Place at Garden State Park, a new mixed-use project was developed by Edgewood Properties on the 223-acre site of the former Garden State Park racetrack in Cherry Hill, N.J. Robert K. Futterman & Associates, Inc. is the exclusive retail leasing consultant for 250,000 sq.ft. of lifestyle retail space, which is only a small portion of this project. Other features include a 500,000 sq.ft. power center, 360 townhouses, 691 luxury apartment units, 608 active adult residential units, one million sq.ft. of office space and a 200-key hotel. The project is bound on the west by the NJ Transit Atlantic City Line, on the south by Route 70, on the east by Haddonfield Road and on the north by Chapel Avenue. “The redevelopment of Garden State Park is extraordinary,” Hatch said. “The Cheesecake Factory in the lifestyle center has up to a three-hour wait on Saturdays.”
Edison Towne Center is a one million sq.ft. shopping center on the redeveloped site of a Ford Motor Co. plant. Welco Realty, Inc. is preleasing the site, which will open Spring 2007. Bergen Town Center is a redevelopment by Vornado Realty Trust at the site of the Bergen Mall. The 1.067 million sq.ft. shopping center is tenanted by Marshalls, Gap/Gap Kids Outlet, New York & Company, Saks Off 5th, a proposed Target and a proposed Whole Foods.
Though retail sales are strong in the Northeast, most retail real estate professionals predict that there will be some bankruptcies in the coming year. Gartner expects furniture stores to be in particular trouble with more store closures coming. Dollar stores are in trouble, facing competition from Mom-and-Pop stores, said Bill Melvin, Jr., CEO of National Retail & Equipment Liquidators, which buys and sells used store fixtures and equipment. Supermarkets, too, are having a difficult time trying to compete with Target and Wal*Mart. In addition, Melvin pointed to A&P Tea as a company that may file for bankruptcy. He said many chains, however, are staying out of bankruptcy because the extra liquidity in the market due to hedge funds and private equity groups, citing such companies as Marsh’s, Mervyn’s and Shopko. “When they have might have filed Chapter 11 in six months, they are instead bought up and basically liquidated out of court, tightening up the portfolio of stores and then put back up for sale,” Melvin said. Lanyard noted a list of companies that have closed numerous stores on the East Coast or already have begun the process. Treasure Island closed all 16 of their stores and Office Max closed 10 locations in New Jersey. In addition, he points to Seamans/Levitz, Harrows, Pathmark, Toys “R” Us, Sears Hardware, Acme and Carpet Depot. Lifschultz believes that supermarkets will begin to consolidate and many music and video stores will start closing in the coming years. In addition, he says Pier 1 may start to close stores in the Northeast. “They don’t have the product line to compete with the Restorations and Pottery Barns of the world,” Lifschultz said. Welkis believes that apparel retailers will be facing a decline in sales. “They seem to be soft particularly in the fashion moderate price range,” he said.
Despite high density, potential saturation and rising rents, retail real estate professionals say there are still opportunities for new developments within the Northeast. Principals at Levin Management point to Cabella opening a 250,000 sq.ft. location in Hamburg, Penn., an area that is now getting interest from other big box retailers. Lanyard believes opportunities are available in New Jersey with more franchises entering the state, the expansion of fast-casual restaurants and the increase in the development of lifestyle centers, mixed-use centers and transit village projects. Gartner believes that aggressive franchising will help to expand the fast-casual dining concepts. While Target, Wal*Mart and other similar stores will continue to do well, they will find it increasingly difficult to find property to inhabit.
Some believe that there will be no way around the shrinking amount of land, except to redevelop properties. Hatch said this will contribute to a slowing of leasing and new projects. Mirandi believes the market will inevitably slow down in the Northeast as the economy softens and consolidation continues in the retail sector.
Though there are differences of opinion on whether the Northeast market will continue growing next year, most retail real estate professionals believe that there are still areas to explore in the market where retailers and developers can be successful. With intense competition for space and favorable demographics, the demand for retail space in the Northeast will not wane soon. |