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Retail Traffic

Development Takes Northeast By Storm

With the aid of a booming economy, the Northeast-ern states of New York, New Jersey, Delaware and Pennsylvania have experienced a retail whirlwind in 1999.

Developers across the region are expanding malls, building big-box power centers, and creating new retail entertainment complexes in virtually all primary and most secondary markets in the region. With few exceptions, vacancy rates in major and secondary markets remain low to moderate, despite the space added to inventory by the bankruptcies of several national chains.

The development of big-box centers in Northeastern states stands out as the most compelling trend of the year. In many areas of the country, over-building and subsequent closings have created a glut of big-box space. Northeastern big-box development has not followed suit.

According to retail real estate brokers, in the past, high rents and difficulty finding suitable space have kept most big-box chains from making a big push in the Northeast.

However, in 1999, with over-building creating problems for big-box stores elsewhere in the country, these retailers made strong moves into New York, New Jersey and eastern Pennsylvania. They finally decided to accept higher development costs and higher rents in return for the high volumes of traffic in these densely populated regions of the country.

New York, New York New York state, of course, is two different places: New York City and upstate New York. While the upstate operates like most states, with several primary and secondary markets for retailers, the New York City metropolitan statistical area, with a population of 18.8 million people, remains a place unto itself.

And the place of places in New York City is Manhattan. "Sometimes, Manhattan is the last market on a retailer's market list," says Charles Aug, president of Garrick-Aug Associates Store Leasing Inc., one of the largest retail brokers in New York City.

"It's the biggest market in the country and also the most expensive," he says. "Retailers visit, see the high rents, and run away. Sooner or later though, they realize that rents are so high because traffic volumes and profits are so high."

According to Aug, this process is playing out in the year's most important retail developments in Manhattan, which lie in Times Square and SoHo.

Two major entertainment centers are nearing completion in Times Square: E Walk, a project of New York-based Tishman Urban Development Corp.; and the 42nd Street development project by Brooklyn, N.Y.-based Forest City Ratner Cos.

Both will open this year and cap off the transformation of 42nd Street with significant hospitality, entertainment and shopping offerings. Tenants include names like AMC Theatres on the entertainment side and Just For Feet on the specialty retail side.

Each development will have a stadium-seating megaplex, the first of these to reach Manhattan. The new centers are also attracting new retailers to areas adjacent to Times Square.

Examples include Bebe and The Loft, from AnnTaylor, both of which are 1999 openings.

South of Greenwich Village, SoHo has turned into the most dynamic market in Manhattan, according to Aug. "SoHo has been growing for 20 years," he says. "Its strength is that it caters to the entire marketplace, with high-end and popular-priced stores side by side. New retailers opening in SoHo this year include Old Navy and Prada, a very upscale, high-fashion Italian clothing store."

SoHo's neighbor NoLita (an acronym for North of Little Italy) has begun to attract dozens of young designers and new retailers who cannot afford the higher-priced SoHo. (See related story on p. NE22.)

A few blocks north, the Flatiron area between 14th and 23rd streets continues to offer fashionable apparel. Retailers include Armani Exchange, Gap, Banana Republic and a recent entry, George Smith, an upscale London-based menswear chain.

The area one block west on the Avenue of the Americas might be called Manhattan's power center, thanks to retailers such as Bed Bath & Beyond, Filene's, T.J. Maxx, Today's Man, The Sports Authority, Old Navy, Burlington Coat F actory and other big-box names.

According to a Garrick-Aug study of Manhattan, leasing activity moved ahead briskly during the first half of 1999. Landlords rented 397 stores with 943,000 sq. ft. of retail and support space in the period. Rents averaged $79.73 per sq. ft., about 4% lower than the average asking price.

Along with the activity in the city's primary retail districts, Harlem, in upper Manhattan, is in the midst of a stunning revival. Renovated cultural facilities and historic buildings and a dramatic decline in crime have boosted Harlem's inner-city image. New housing developments have brought new residents. Between 1989 and 1999, the median income of the area doubled.

These trends have fueled new retail development. Last April, Pathmark opened a 50,000 sq. ft. grocery store at 125th Street and Lexington Avenue. According to a New York Times report, the store is the first major supermarket chain to open in Harlem in 30 years.

Also, there is Harlem USA, a 285,000 sq. ft., $66 million entertainment retail center that will begin store openings before the holidays. Among its offerings are a nine-screen theater, The Disney Store and Old Navy. (See related story on p. NE4.)

Brooklyn, the Bronx and Queens are flourishing as well, according to James Ventura, regional manager of the Manhattan office of Palo Alto, Calif.-based Marcus & Millichap Real Estate Investment Brokerage Co. "In these areas, the market is tightening and rents are rising," he says. "You will see rents as high as $50 per sq. ft. and even $100.

Median incomes in the three boroughs remain relatively low, considering the cost of living in the New York metropolitan area. In Brooklyn, median household income runs to $33,663 per year; in the Bronx, it is $28,016; and in Queens, it is $43,592.

But retailers are coming to these areas for volume. "These areas are attracting a host of national tenants, who have found that household incomes here are less important than the volume of traffic," Ventura says. Population density provides that volume: Brooklyn's population is 2.6 million; the Bronx's is 1.2 million; and Queens' is nearly 2.1 million.

In the suburbs to the north of New York City, Westchester County, Rockland County and White Plains have experienced significant retail development over the past 12 months. The Westchester Mall expanded from 250,000 sq. ft. to 750,000 sq. ft., a move that stimulated big-box activity nearby. For example, a 31,000 sq. ft. Circuit City recently opened its doors across the street.

In Rockland County, the 1.8 million sq. ft. Palisades Center has attracted a number of big-box retailers from locations on Route 59, creating many vacancies along that corridor. According to Mark Kapnick, associate director of Garrick-Aug, a half dozen large spaces are looking for tenants there. At the same time, other big boxes are making deals along the corridor. Home Depot just signed up to develop its second Route 59 store, and OfficeMax arrived in 1999.

Several major projects are under way in White Plains. The most notable comes from Tischman Speyer, which purchased a freestanding former Macy's on Main Street and plans a three-level, 400,000 sq. ft. town center development that will house a 130,000 sq. ft. Sony theater. "Other deals are pending," Kapnick says, "and the possibilities include a number of major retailers."

Upstate New York Upstate New York's primary markets include Albany, Syracuse, Rochester and Buffalo, which move in that order from east to west across the state along Interstate 90.

With a population of 875,000, the trade area surrounding Albany continues to offer a stable retail environment, thanks to the steady economic characteristic of state capitals. Three regional malls - Crossgates Mall, Colonie Center and Latham Circle Mall - pace the retail activity in Albany. Several big boxes have entered the market because of these developments.

"Circuit City is going into Crossgates Commons, the power center adjacent to the mall," says Neville Gruenberg, a broker with Pyramid Brokerage Co. Inc. of Syracuse. "Best Buy also is building a store at Crossgates Mall. Both are new retailers in this market. Colonie Center just added a Boscov's to the anchor lineup."

Target, also new to the area, is building a store on the site of the old Northway Mall, which was demolished in 1999. David's Bridal and Staples will join Target in the new power center.

Syracuse, with a population of 746,000, experienced several market entries and closings in 1999. AutoZone, PetCo and Chili's have all opened first locations in the area.

The Hechinger's bankruptcy gutted a strip center in the town of DeWitt. When the home improvement retailer closed, co-anchor Price Chopper decided to move to a freestanding location in the city. Within the past year, National Tire and Battery (a Sears' concept) opened and then closed two locations in Syracuse.

The Rochester trade area offers retailers a population of 1 million people and a median household income of $45,000. During 1999, the region's unemployment rate held steady at 3.6%, despite downsizing shocks from three major employers.

Rochester's sturdy economy has attracted new market entries from several big-box retailers. "In the past year, Target has opened two stores in the area and has another on the way," says Andrew Dollinger, associate broker in the Rochester office of Los Angeles-based CB Richard Ellis. "In addition, Wal-Mart has proposed two 200,000 sq. ft. supercenter stores that will complement their existing traditional stores here. Other new players in this market include Lowe's, Best Buy, BJ's, and Jo-Ann Fabrics and Crafts, which is introducing a new, 50,000 sq. ft. big-box concept."

Existing retailers are rolling out plans in the area as well. Home Depot is currently developing its fourth area store, for example.

The Buffalo metropolitan area, with a population of 1.2 million and an average household income of $46,347, anchors the retail business in western upstate New York. According to David Tytka, director of marketing and research with NAI Pyramid Brokerage Co. of Buffalo, market highlights in 1999 include expansions of area malls and power centers.

The area's largest regional mall, the Walden Galleria Mall, has signed leases for a total of 237,600 sq. ft., including 80,000 sq. ft. of new construction for Galyan's Trading Company, Tytka says. A number of existing retailers have expanded their stores, and two new retailers, Kahunaville and Weathervane, have come on board.

Tytka also notes that Boulevard Mall plans to add a two-story, 128,000 sq. ft. Sears.

As in other areas of the state, big-box activity has heated up in Buffalo. "Benderson Development has added approximately 180,000 sq. ft. to their several area Consumer Squares," Tytka says. "The additional space will house stores such as Office Depot, Linens 'N Things, Party City, and Jo-Ann Fabrics and Crafts."

Retailers entering or expanding in Buffalo include Brand Names, Kmart, Imax Theatres, Chili's and OfficeMax. Builders Square and Sun TV have closed stores in the area.

New Jersey If the pattern holds, and there is no reason why it shouldn't, New Jersey's current economic expansion will extend to 90 months by the end of the year. Unemployment in the state has hovered below 5% for two years. Between July 1998 and June 1999, the state's economy produced 66,300 new jobs, according to a report by First Union Corp. Economics Group. Retail ranks among the leading job producers in the state, having added 16,300 jobs during the period.

According to the New Jersey Department of Labor, per capita income across the state rose 4.9% in 1998, reaching $33,937, well above the national per capita income of $26,412.

It's a remarkable performance for the nation's most densely populated state. Seven million people live in New Jersey, most within 30 miles of New York City.

The retail sector has been reaping the benefits of this dramatic economic growth across a huge population. A Marcus and Millichap study found, for example, that retail sales in New Jersey shoppingcenters have risen by 4.2% since 1997 and may reach $24.3 billion by the end of 1999.

Despite dramatic shortages of land, national retailers converged on the state in 1999 and produced a thunderclap of development activity. In the Newark metropolitan area, Marcus & Millichap estimates that 1.1 million sq. ft. of new space will come to market by year's end, a total that may double during 2000. In Middlesex County, 700,000 sq. ft. of space is planned, while five shopping centers and two supermarket-anchored centers are planned for Bergen County.

New Jersey's retail mecca is still Paramus in Bergen County. "The first place most retailers entering New Jersey should go to is Paramus," says Richard J. Brunelli, president of Old Bridge, N.J.-based R. J. Brunelli & Co. Inc. "There are 500,000 people living within a five-mile ring of Paramus. Some communities within this ring have average annual household incomes of more than $100,000."

Major retail developments in Paramus occur along Route 17 and Route 4, Brunelli says, adding that some big boxes have stores on both roads. Also, Paramus has five enclosed malls, each surrounded by big-box centers.

Across the state, and in northern Jersey in particular, vacancy rates are low and rents are high. Land values run as high as $1 million per acre in Paramus and can approach $2 million, according to Brunelli.

"New construction (in 1999) occurred in some of the most difficult scenarios for development," Brunelli says. "For example, the BJ's on Route 23 was built on a site with steep slopes and rocky terrain. In other cases, developers have built new retail projects on sites that previously housed manufacturing plants or bowling alleys."

These projects demonstrate the level of creativity required of retail development in northern New Jersey. "While it could take years to build a site here," he says, "the extra effort pays off because of the high rentals and the confidence that the center is being erected in a market that's highly unlikely to become overbuilt."

Because vacant land is so hard to find and to develop, new development often follows bankruptcies. When Caldor closed last year, for example, Kohl's entered the northern New Jersey market. "A number of 80,000 sq. ft. Caldors were taken by several retailers and subdivided," Brunelli says.

Cost Less Home, a big-box format from Lechters, has pursued this strategy, taking 20,000 sq. ft. spaces in various vacant Caldor spaces.

When Rickel closed and returned space to the market, Lowe's showed up in northern Jersey and Home Depot expanded. Rickel alone closed over 100 stores two years ago. "That made a lot of prime space available," Brunelli says. "Virtually all of it has been absorbed."

Retailers entering the New Jersey market in 1999 include Kohl's, Circuit City, Target, Lowe's and Best Buy. "All have plans to move into the 24 or so commercial retail hubs in northern, central and southern New Jersey," Brunelli says.

Pennsylvania The Commonwealth of Pennsylvania is anchored in the east and west by its two largest cities and retail trading areas: Philadelphia and Pittsburgh.

In the east, Philadelphia and the surrounding metropolitan area offers retailers a population of nearly 5 million people. In the west, just over 2 million people live in the Pittsburgh metropolitan area. A number of secondary markets thrive between these two giant, and in some ways opposing, anchor cities.

Following years of decline during the 1980s, the current political administration has repositioned the city of Philadelphia and begun to attract new retail development.

"The area east of Broad Street has enjoyed a regeneration in the past three or four years," says Stuart Conston, director of tenant representation with Philadelphia-based Equity Properties Inc. "The city has built a new convention center and several new hotels. In addition, there has been major redevelopment in the arts district along Broad Street."

A more attractive city has lured new retail development to the downtown. The Goldenberg Group, a Blue Bell, Penn.-based developer, recently broke ground for a DisneyQuest center at 8th and Market streets across from the flagship Strawbridge's Department Store. Plans call for a cinema, themed restaurants and retail.

In the upscale Philadelphia suburbs, retail development activity mirrors New York and New Jersey: Big boxes are moving in.

In Delaware County, along Baltimore Pike, for example, Target and Bed Bath & Beyond have each taken a floor in a redeveloped two-story department store. On Chester Pike, Philadelphia-based Wolfson-Verrichia Group Inc. is building a 275,000 sq. ft. center for Wal-Mart, a supermarket and several smaller retailers.

"In Exton, Wolfson-Verrichia plans to open an 800,000 sq. ft. power center anchored by Wal-Mart and several other big-box retailers by 2001," Conston says. "In Montgomery County, Goldenberg Group is building another power center called the Metroplex, which will offer 750,000 sq. ft. Big-box names will include Target, Lowe's, PetsMart, Office Depot and Bed Bath & Beyond."

Also in Montgomery County, Philadelphia-based Vesterra Corp. is developing the 400,000 sq. ft. Montgomery Square. "This should open in 1999," Conston says. "Retailers include Target, Filene's, Bed Bath & Beyond, CompUSA, and Barnes & Noble."

As with other Northeast markets, Philadelphia has not been overbuilt with big boxes. "We're probably five years away from being where a city like Phoenix is today in terms of big-box development," says John McDermott, vice president and regional manager of the Philadelphia office of Marcus & Millichap. "The northeastern region remains fresh ground for big boxes."

Paced by big-box and entertainment center development, new retail construction across the Philadelphia region totaled 4.6 million sq. ft. in 1998, according to a Marcus & Millichap Retail Research Report in July. Another 4 million sq. ft. will enter the market in 1999.

Marcus & Millichap explains the decline as "a result of uncertainty surrounding interest rates, a shortage of labor and slowing employment growth in the region."

New space will raise the regional vacancy rate to 7.4% by year's end. The Marcus & Millichap report contends that available space will not outpace tenant demand and points to moderately rising rents across the region as proof.

To the west, in Pittsburgh, big-box development is mixed. "Target is new in the area and has opened five stores," says Robert Gold, senior vice president in the Pittsburgh office of CB Richard Ellis. "Lowe's is expanding throughout the area."

On the other hand, big-box closings by CompUSA, Sun TV, Service Merchandise and Builders Square have softened the market and created vacancies, continues Gold. "New big-box activity is coming from retailers that prefer to build from the ground up," he adds. "These retailers are not taking the vacant space left by the closings and consolidations."

The big story in Pittsburgh, however, is a major redevelopment effort downtown. In the 1950s, Pittsburgh redeveloped its downtown in a project dubbed Renaissance I. In the early 1980s, Renaissance II took the city to the next level in terms of office, hotel and convention center development.

The current redevelopment plans focus on retail and urban entertainment and will affect areas untouched by the earlier efforts.

"In and near the city, there is significant development," Gold says. "In Homestead, just across the Monongahela River, a mega-project is under way called The Waterfront." Developed by Columbus, Ohio-based Continental Real Estate Cos., The Waterfront will include Dave & Buster's and a 20-plex Loews Theatres. On the retail side, Lowe's, Target and Giant Eagle have taken space. (See related story on p. NE30.)

In center city, Chicago-based Urban Shopping Centers Inc. is planning a $450 million urban entertainment project that will span a half dozen blocks in the city's main retail district. According to Gold, AMC Theatres will build an 18-screen cinema for this project. Lord & Taylor is building a store as well. "This is in the planning stages now, but it will become the city's next major rebuilding effort," Gold says.

Although still in the early planning stages, this project has had a significant effect on retail activity in the region, by putting specialty retailers on hold. "Every specialty retailer I talk to is waiting to see what happens downtown," Gold says.

While retail activity in Pittsburgh differs from that in most of the rest of the Northeast, Pennsylvania's secondary markets also are focusing on big-box entries and expansions.

To the north in Erie, for example, two power centers are being built next to Millcreek Mall at the intersection of Interstates 79 and 90. Big-box tenants such as Gander Mountain will fill the new space. To the south in Altoona, Target and Circuit City entered the market in 1999. In neighboring Johnstown, the de-malled Richland Mall will host big boxes such as Kmart and Michaels.

The central Pennsylvania market of State College features more of the same, with a new development called the Colonnade at State College, which will offer Target, Home Depot and a new supermarket entry from New York called Wegman's.

Delaware "Delaware is a diamond in the rough for retailers," says Sean McCue, president of Wilmington, Del.-based Deaton McCue and Co. Inc.

"If you locate a store in Delaware, you get the benefit of Delaware markets as well as markets in southern Pennsylvania, northern Maryland and western New Jersey," he explains. "Shoppers flock here because we have no sales tax. As a result, you'll see major retail developments near the state lines and the interstate exits."

By way of example, McCue points to a new Home Depot that opened at Peoples Plaza along Route 40, about two miles from the Maryland state line. And when Target entered Delaware in late 1998, the retailer selected a site in the Brandywine Town Center, just one mile from the Pennsylvania line.

Of course, playing the sales tax angle against neighboring states isn't the only reason to open stores in Delaware. Small though it is, Delaware's population of 675,000 forms three sturdy retail markets: New Castle, Kent and Sussex counties.

New Castle County in the north houses three-fourths of the state's population - about 450,000 people - and provides space for most major national mall anchors, in-line specialty stores and big boxes.

The next largest area in Delaware, Kent County, saw some retail growth in 1999, with the expansion of Dover Mall to include Strawbridge as a new anchor.

The real action in the state these days seems to be occurring in Sussex County in Rehobeth Beach. "There has been explosive growth in this area," McCue says. "A lot of retailers, including big boxes, are entering this market. Lowe's is building a new store in Rehobeth on Route 1, the main retail corridor. And Kmart opened a new store there just last year. Big boxes like Staples and T.J. Maxx have also opened stores in Rehobeth during the past six months. So far there is no Sports Authority, CompUSA or Best Buy in Rehobeth, but all three have been looking."

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