COVER STORY, OCTOBER 2008

SOUTHEAST HAS RETAIL EDGE
Region fairing better than the rest of the country.
Jon Ross

It’s human nature to believe that the grass is always greener on the other side of the fence, but according to developers and brokers in the Southeast, retail development in this part of the country is handling the slumping development market with more tenacity than the rest of the United States. Some areas are better equipped to handle the sudden paucity of lenders and scarcity of financing than others, but retail development in the Southeast, for the most part, continues chugging along.

In this issue, Southeast Real Estate Business evaluates the retail development market in three sectors of the region. Developers and brokers in major areas of the Southeast routinely face the same hardships, with a lack of financing being one of the major pitfalls to retail development.

There have been a number of changes in the financial markets in the past year and a half. According to Warren Higgins, the director of Capmark Financial Group’s Philadelphia office, four major differences can be spotted in the Southeast markets. Today underwriting is more difficult, loan dollars aren’t as free-flowing as they used to be, capital availability is on a downturn and interest rates continue to climb. Retail developers are still coming to lenders asking for money, but requests have slowed just as the financial markets have necessitated that lenders hold more stringent financing requirements. Higgins estimates that at the beginning of last year, lenders were willing to loan money based on a small amount of cash equity, sometimes as low as 10 percent. Today, lenders need around 25 percent equity to even consider lending money for an acquisition.

“You’ve got a fundamental disconnect between what a buyer can pay for a property now based on the financing that can be obtained versus what a seller is willing to part with a property for,” Higgins says.

This new way of doing business has ushered out CMBS lenders and cleared the floor for portfolio lenders and institutions that aren’t as ready to give out money to developers. The former institutions were anxious to generate high loan volume so were willing to give money based on lower and lower amounts of equity, and now the pendulum has swung the other way. “Portfolio lenders are looking for virtually risk-less transactions, and that’s the only way you can get them to part with their money,” Higgins says. “The project almost has to be perfect in every way.”

The risks associated with projected growth developments have made lenders more likely to fund infill projects, driving developers from the suburbs and into the city centers. Though this isn’t the rule, most lenders see the ascent of gas prices and the uncertainty of the economy as reasons to finance transit-oriented projects and mixed-use centers that champion walking over driving. Unfortunately, Higgins doesn’t see the retail development market really turning around any time soon. “I don’t know what inning we’re in,” he says, “but we’re not in the eighth or the ninth, for sure.”

Carolinas

In Raleigh, signs of the slowing real estate market are shifting the way retailers do business. Where previously there was a large pipeline of projects under construction, developers have started delaying proposed deals until after the uncertainty in the market dissipates, perhaps 12 to 18 months down the road. When activity picks up, Crosland’s Austin Williams says, Raleigh will see smaller mixed-use developments and retail in neighborhood centers proliferate. “I just think you’re going to see trends toward people moving back to the cores of our cities,” Williams says, pointing out that because of the current economy, proposed buildings aren’t necessarily being constructed, leading to a backlog of projects. “In the Triangle market as a whole, we’ve gone from 6 million square feet proposed last year to almost 13 million square feet proposed this year.”

In the Knightdale suburb of Raleigh, Crosland is currently developing the 225,000-square-foot Midtown Commons Shopping Center, which will also include 15,000 square feet of outparcel space. The powercenter is anchored by Kohl’s, Best Buy, Dick’s Sporting Goods, T.J. Maxx and PetsMart, and these tenants will be moving in late this year to the first quarter of 2009. The development will create 350 jobs for the area and may spur other opportunities in the vicinity. Williams sees this development as bringing needed retail shops to an area of the state that has been passed over. “The impact is pretty big,” he says. “It provides, from a national standpoint, more diverse and focused offerings of retail goods.”

Other developments in the area include First Carolina Properties’ 600,000-square-foot Park West Village in Morrisville, a town off Interstate 40 between Raleigh and Durham in Wake County. Kite Realty Group also has three projects along the Interstate 55 corridor, totaling more than 2 million square feet. Goodwin points to these projects as examples of developments where tenants have more bargaining power than in the past. “Deals that tenants are negotiating are definitely a little more favorable in terms of what they’re able to command for rents,” Goodwin says. He notes that retailers that haven’t been in Wake County before are taking advantage of the current market.

In Charlotte, 2 hours to the south, the lack of financing is making new projects hard to come by. Retailers aren’t expanding—a common theme in many areas—because it’s harder for developers to find money.

“The credit markets have pulled back. They swung from being very open in lending, and now it’s becoming almost too tight,” says David Niekamp, director of retail development at Charlotte-based Crescent Resources. “Before, you could finance a greater percentage of it [the project] without putting in so much equity. Now, you can still get loans, but they’re a little bit more stringent and harder to get.”

Crescent Resources is currently developing two projects in the Charlotte area. Located on Interstate 85, Belgate is a 200-acre mixed-use project anchored by the first IKEA in the Carolinas. The rest of the project’s 400,000 square feet will be filled with two hotels, a multifamily site and three shopping centers. Belgate construction began in 2007, and IKEA will be open by spring 2009. The Shoppes at Ardrey Kell, located on Ardrey Kell Road in Charlotte, celebrated the opening of its 48,000-square-foot Harris Teeter anchor in May. Seventy-five percent of the remaining 99,000 square feet is currently leased, and two of the outparcels are sold. Crescent is also planning a powercenter southwest of the city in York County, where Lowe’s Home Improvement Warehouse will open in November, and Super Wal-Mart is slated for an opening in the second quarter of 2009.

Two projects have been put on hold due to the uncertainty retail tenants see even in a market that seems relatively stable. Crescent is still a couple of years away from its 260-acre mixed-use project in Kannapolis, a 30-minute drive north of Charlotte. The project initially started out at 476,000 square feet with 12 outparcels, but Niekamp is still negotiating with tenants. Huntersville Gateway in Huntersville has commitments from small to mid-size retailers, but construction of the 86,954-square-foot project is still off in the future.

“Retailers are becoming more selective on locations,” Niekamp says. “A number of retailers that are publicly owned are scaling back their expansion and using those capital funds to buy back stock, pay down debt or pay higher dividends.”

Across the state line, 100 miles south of Charlotte, retail development in Greenville, South Carolina, is steady. The city has benefited from its position as the hub center to the northwest corner of the state, a place that 250 international firms call home. Rental rates have been declining since the third quarter of 2007, but vacancy rates are at a respectable 7.2 percent. One aspect that’s helping retail in the city is residential construction.

“The Greenville housing market has seen stable appreciation, and new home construction has not declined as much as it has in many major markets,” says Austin Knapp of NAI Earle Furman. He notes that when retailers see more rooftops popping up, they start to express interest in the area. “Many retailers see a direct and positive correlation between markets experiencing new home construction and retail spending.” 

The Greenville metro area now houses more than 1 million residents, and an industrial presence by BMW, General Electric, Fluor Corporation and Michelin has helped grow the economy with large new investments. One of the biggest draws, according to Knapp, is the $1 billion in retail spending the city experienced last year, which will work to attract retailers. “Growing retail was once a challenge,” says Bruce Aughtry of the Windsor/Aughtry Company, “but given the fact that downtown Greenville is now truly a destination location like Charleston, retail continues to flourish.”

Winsor/Aughtry is developing Main at Broad in Greenville.

Windsor/Aughtry’s development of the $45 million Main at Broad will help bring more retail to Greenville, Aughtry says. The project is anchored by a 135-room Courtyard by Marriott and will feature 65,000 square feet of office and retail space and a Nantucket Seafood Grill. The company also has a hand in a Fresh Market relocation on Antrium and Pleasantburg drives, but leasing is proceeding slower than expected.

While acknowledging that retail development isn’t as strong as it was 2 years ago, Aughtry retains a positive outlook. “Once the residential woes subside, the lenders regain their appetite and consumer confidence returns, the Greenville and Upstate communities will be fine,” he says. “We remain optimistic for our future.”

Mid-Atlantic

While retail growth in the mid-Atlantic has slowed significantly, the Washington, D.C., metro area and its outliers is still experiencing expansion. The metro market boasts a vacancy rate hovering around 5 percent, and according to Demetri Koutrouvelis, managing director of Studley’s Washington office, the average rental rate is $40 per square foot. A large retail trend in the metro area, he says, is vertical mixed-use.

“We’re seeing trends with the new developments that are being built up with a retail-based component in them,” Koutrouvelis says. “You’ll have the retail on the first floor, sometimes the second, and then office and possibly residential.”

The suburban areas are benefiting from the city’s retail growth as well. Geoffrey Mackler of H&R Retail hears a tinge of jealously when he talks to people in the Midwest about retail developments in that part of the United States.

“Especially relative to other parts of the county—I speak to a lot of friends of mine in the Midwest and the South—we’re still relatively healthy, especially anything that’s within 20 or 30 miles of Baltimore or Washington,” Mackler says.

Constitution Square in Washington, D.C.

Many of the larger mixed-use developments in Washington also prominently feature retail space. NoMa—an acronym for North of Massachusetts Avenue—is jump-starting a sidewalk community in the city, and retail space is going up in the Washington Nationals ballpark area. Harris Teeter is opening a 50,000-square-foot store in Constitution Square, located at the corner of First and M streets in Washington. Affiliates of Bethesda, Maryland-based StonebridgeCarras and Chicago-based Walton Street Capital will deliver the 1.6 million-square-foot first phase of the project in 2010. Harris Teeter will open its doors in the winter of 2011. Five Guys Burgers and Fries, Pound Coffee, Heidi’s Brooklyn Deli and Sister’s Pizza & Mussels have also just opened in a building in the NoMa area. Developments like these signal a return to the city as a thriving retail metropolis.

“Historically, Washington’s been a retail city,” Koutrouvelis says. “If you look at the F Street corridor, it was a very vibrant retail corridor. Within the past few years, it’s come back to a retail thoroughfare once again.”

“The metro infrastructure is important,” Mackler adds, “and retailers and office users like to be in very close proximity to the subway system.”

The labor sector of the Washington, D.C., area and the mid-Atlantic as a whole plays a major role in retail development. When businesses move to the area and create jobs, the new workforce immediately creates a demand for shops and restaurants.

“We have a talented and growing labor pool able to support a variety of industries. That bodes well for the business community at large,” says Don Stedham, vice president of investments at Regency Centers in Vienna, Virginia. “Our retail partners understand this dynamic and are willing to at least look at the opportunities this environment affords.” Mackler also points to the Bush White House as helping fuel retail developments by creating more jobs in and around Washington. “This current administration has really grown the government through third-party contractors,” he says. “The employment here is just so great that we’re not seeing the job losses that other parts of the country are experiencing.”

Regency Centers is currently developing retail outside the metro area, including the 330,000-square-foot Shops at Stonewall, a Wegmans-anchored center in Gainesville, Virginia. Construction started last year, and Bed Bath & Beyond, Michaels and Staples have already opened in the $50 million community-oriented center. The 140,000-square-foot Wegmans will open next month with Ross Dress For Less to follow. 

“The Shops at Stonewall serves a very educated and affluent population base,” Stedham says, noting that bringing in a tenant like Wegmans will have a huge impact on the market, but that doing well in the current market is still an uphill battle. “Competing centers will certainly have to find a niche in order to flourish in the long run.”

Journey too far outside the metro area, however, and retail development starts to drag. Mackler points to markets 50 to 70 miles outside Washington and Baltimore as those that have been the hardest to generate new projects. The suburbs and the less urban areas face a growing challenge because of the declining retail market. Rural spots have more land on which to develop, but open spaces are populated by significantly smaller amounts of workers. “The tenants that are building out there are struggling,” he says, “and the ones that had deals that were in the pipeline that hadn’t executed leases yet are pulling out.”

Gulf States

In the Gulf States, an area more dominated by rural living than other regions of the Southeast, retail development comes in small pockets. The area in and around Jackson, Mississippi, has a large concentration of retail projects. Tuscaloosa, Alabama, is also a city on which retailers are focusing. As in other places, outlets and discount retailers continue to do well.

“Historically, when there have been downturns in the economy, the outlet industry has thrived,” says Jason Voyles, president of Jackson-based Spectrum Capital. “When times are good, people like bargains, when times are bad, people need bargains.” With the economy slowing the expansion plans of high-end retailers, those that own outlet divisions are still experiencing growth.

Even though Jackson is dealing with the current economic challenges fairly well, Voyles still points to retailer uncertainty holding back further development. Being a college town and benefiting from a fresh infusion of people every semester, Tuscaloosa is more immune to economic woes. But things could still be better. “When the market goes down for several consecutive days and things are looking really doom and gloom, retailers are not likely to proceed with expansion plans,” Voyles says. “As soon as things start settling down a little bit and become more stable, which we’re seeing, retailers will slowly and surely get back into the game.”

Tuscaloosa’s Dynasty Park, complete with street-level retail, will deliver in 2010.

Spectrum Capital is currently developing Dynasty Park in Tuscaloosa near the University of Alabama, a development that Voyles bills as “the ultimate university experience.” The mixed-used project will feature a 250-unit hotel, 65 residences and street-level retail. Construction will commence early next year, with delivery expected in late 2010. Retail tenants have not been announced.

The big development right now in the Jackson area is Riverwind, which sits along 1.5 miles of Interstate 20 in Pearl, Mississippi. Riverwind CEO Judy Hall started the project in 1995 and has continually added extra retailers to the development. Growth was spurred on by construction of the Mississippi Braves minor league stadium in 2005, and the addition of a Bass Pro Shops Outdoor World brought 2.3 million visitors a year to the area. “We started with 35 acres,” she says, “and now we’ve gone up to about 200 acres.” Current projects include the 50,000-square-foot Shoppes of Riverwind West and the 23,000-square-foot Outlets at Bloomfield. The Shoppes of Riverwind West will focus on local and regional tenants, bringing fitness and nutrition retailers to Riverwind. Tenants are also being approached to move into an 8.14-acre outparcel on U.S. Highway 80, and Sam’s Club has just broken ground.

Hall says Riverwind will attract visitors from throughout the state, making this bedroom community a little more lively. The development’s location near the major Mississippi thoroughfares—interstates 20, 55, 49 and Highway 80—helps draw visitors passing through to far off destinations, and the vast array of retailers in the area stimulate job growth. “Regionally, it’s going to mean more jobs for the capitol, more income and more tourism, which is what we need in a rural state,” she says.

Riverwind seemed to just pick up more steam as time went by, but Hall points to the city as a significant partner in the development process. The local government is studying the older parts of Pearl looking for retail possibilities, and companies are noticing run-down shopping centers in need of redevelopment. “If the city wasn’t so pro-development, we would never have made it,” she says. “If you have a good economic plan, this absolutely is an area where people will sit down and listen and talk to you. If it makes sense, we can usually get it done.” Voyles agrees, noting that it’s hard to pull together a complete development package that works for lenders, developers and retailers, but it’s not impossible. “If you have a good development plan, you’ve got a track record and you’ve got the financial wherewithal to develop the project,” he says, “then financing is available.” 

Pelham, Alabama, a city of just more than 20,000 people, is 20 minutes south of Birmingham. Birmingham-based Sharp Realty & Management recently completed construction on Pelham Towne Center, a 74,000-square-foot center located at the intersection of Highway 52 and Huntley Parkway in Pelham. The center is anchored by a 45,600-square-foot Publix and features 28,000 square feet of shop space and five outparcels. Leases have already been signed with Subway, Top Nails and Sips ‘N Strokes. “Birmingham’s like any attractive middle-market city that is growing,” says Sam Sharp of Sharp Realty & Management. “As far as particular developments go, it’s generally the same conditions in Birmingham that you’d have in Nashville, Charlotte or parts of Atlanta. It’s just a matter of growth and demand.”

Mark Gottlieb, founder of suburban Atlanta-based MetroGroup Development, sees a problem with prospective development in Atlanta that firms across the Southeast are confronting. In his deals, the farther he gets from the Atlanta metro area, the harder it is to convince retailers to sign on to projected growth developments.

“A lot of the retailers were betting on the growth of the residential being absorbed. That has not occurred in the last 12 months, and it won’t be occurring in the next 12 months,” he says. In his projected deals, he’s become very conservative about the amount of growth predicted. Instead of just building and hoping people follow, his team now does 5-year analysis on residential absorption of lots.

A new way of doing business has come out of the economic pinch. Since retailers are putting anticipated expansion off for a few years, developers across the Southeast have turned to buying up land and waiting until the market levels out. Also, developers have started to require more commitments before building retail centers. “When the credit markets were so loose and active, there was a proliferation of unanchored strip centers all over town,” Gottliebb says of Atlanta. “That will come to a screeching halt.”  

Hall, however, is optimistic about future developments in the Gulf States and Mississippi, regardless of the type of project. The rural areas need retail, and because of the traffic that runs through the state, there is no end to the possibilities.

“We’re still developing our state because it has so many rural areas in it,” Hall says. “It’s just always been an exciting place, and I think it will continue to be that for years.”

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.