Retail Traffic


The past few months have been trying for retail developers. Rent growth has slowed, vacancies are rising and it seems almost every day at least one retailer announces store closings, a decline in store openings for 2008, a bankruptcy or some other bad news.

The credit crunch has compounded the problem. Financing is difficult to come by at the exact same time that tenants are asking owners for rent breaks and other concessions. Negotiations are also taking longer. All that means it's difficult to hit pre-leasing goals necessary to secure financing. And many developers have started postponing new construction.

“There is not a lot of flexibility in current projects, the profits are paper-thin, and the turmoil in the financial markets makes it so much tougher,” says Jeff Fuqua, president of the Sembler Company, a St. Petersburg, Fla.-based developer with a 5.5-million-square-foot portfolio. “There are a lot of projects just not being built because of it.”

New York-based Related Cos. recently announced it was delaying the ground-breaking for phase II of its CityNorth project in Phoenix, to 2010 from 2009. The project calls for 2.5 million square feet of commercial and residential space. Brooklyn, N.Y.-based Forest City Ratner Cos. has said it will delay construction of the office and residential components of its eight-million-square-foot Atlantic Yards development in Brooklyn until demand for space increases. And, various small developers around the country have pulled the plug on new centers altogether.

Conventional wisdom would dictate that the drop in development demand should drive commercial land prices down. After all, faced with a drop in new home construction, landowners in the residential sector have already been selling tracts of land at a loss and parcels can be had “for a song,” according to Fuqua.

However, commercial landowners have been slow to react to the climate change. Land price discounts in the commercial sector average 10 percent at most, says Robert Bach, chief economist with Grubb & Ellis, a Santa Ana, Calif.-based real estate services firm.

But the difficulty in making the numbers work has significantly slashed demand. At the end of 2007, commercial land sales volume was $10.4 billion, down 9.6 percent compared to 2006, according to data from Grubb & Ellis. As of Apr. 11, commercial land sales in 2008 amounted to $67.13 million, reports New York City-based Real Capital Analytics. Speculative investors and so-called land bankers have disappeared and experienced builders are waiting on the sidelines until the prices drop further, says J. Scott Fawcett, principal with Marinita Development Co., Inc., a Newport Beach, Calif.-based development firm.

“Anytime you go through a down cycle, land lags,” says Brian Smith, chief investment officer with Regency Centers Corp., a Jacksonville, Fla.-based shopping center REIT with a 51-million-square-foot portfolio. “When you are entering a downturn, the landowners have a hard time believing that prices have changed. I would say the land prices have not moved significantly at all, but what we are seeing are much, much better deal terms.”

Let's make a deal

For developers confident they can make their projects work, now is an opportune time to buy land, says Fuqua. With much of the competition sidelined, it is easier to find desirable parcels, he notes. Plus, developers no longer feel rushed to close deals — an important consideration when tenants have been postponing store openings by a year or two.

“In many cases you can afford to pay the seller's price if he gives you a longer period of time,” Fawcett says. “You can get some interest from the tenants before you close the escrow. I would pay more for a property if it had a longer escrow period.”

How much longer? In 2007, developers got less than 90 days to close the deal; this year, Fawcett demands as much as 14 months. In a recent transaction for 7.5 acres of land in a suburb of Southern California, Fawcett negotiated a 12-month escrow and a price of $11 per square foot. In 2007, retail pad sites in the region sold for more than $30 per square foot, according to Grubb & Ellis.

There is also less pressure to put money on the table immediately. Smith recalls projects Regency worked on in Florida last year, where it had to put up nonrefundable deposits just to secure sites. The deposits weren't even applied to the purchase price. Today, “You'd probably get a good three to six months before you have to put down a deposit,” Smith notes.

In once overheated markets such as Las Vegas, it's even possible to negotiate deep discounts. There, buyers are refusing to pay more than $20 per square foot, whereas last year, prices averaged $37.50 per square foot, says Fawcett.

Nationally, prices are expected to continue falling through the remainder of 2008 — by an average of 10 percent, according to Bach. Meanwhile, there will also be opportunities to buy land on the cheap through foreclosures. Sembler recently acquired one parcel that way because the landowner “held on to the land before the last second.” Fuqua declined to disclose any more details surrounding the deal.

In addition, large-scale developers that maintain conservative balance sheets like Regency's, which is leveraged only 35 percent, can strong-arm landowners because they can be assured of receiving the necessary funding for their centers.

“The landowners on new projects are realizing if they want to sell, they'll have a lot of challenges,” says Smith. “First, they'll need a developer who has a good relationship with anchor tenants, to get them to sign up. And then, they'll need someone who can get financing.”

Lenders agree. For a new project to receive funding, it not only needs an anchor, but has to be 50-percent pre-leased to nationally recognized, creditworthy tenants, says Michael Hurst, vice president with the structured finance team at Buchanan Street Partners, a Newport Beach, Calif.-based national real estate investment bank. Projects of that caliber have become increasingly scarce.

Slow but steady

At the same time, developers still amassing land have begun to take precautions when bringing new projects on-line.

Marinita, for example, is postponing its openings until 2009 and later, shelving space earmarked for smaller regional tenants and building its new projects in phases to establish enough demand to justify construction.

At its 10.5-acre Jefferson Square project in La Quinta, Calif., anchored by Tesco's Fresh & Easy Neighborhood Market, it has scaled back phase I to 10,000 square feet from 20,000 square feet. Also, it won't break ground on phase II until it has secured another anchor tenant. The project is a joint venture between Marinita and Regency Centers.

Like Marinita, Sembler, which has 4 million square feet under construction and another 4.7 million square feet in the development pipeline, plans to step up joint venture projects with partners, including Steven D. Bell & Co., a Greensboro, N.C.-based privately held real estate investment and management firm with a $3.6 billion portfolio under management.

In fact, partnerships between smaller, regional developers and national firms with considerable reserves of cash are becoming a trend. In March, Scottsdale, Ariz.-based DMB Associates, Inc. inked a deal with Santa Monica, Calif.-based REIT Macerich Company to develop One Scottsdale, a 120-acre mixed-use project in Scottsdale, Ariz. And the Benchmark Group, an Amherst, N.Y.-based developer, partnered with Chattanooga, Tenn.-based REIT CBL & Associates Properties, Inc. to develop two shopping centers in Florida. The projects include the 550,000-square-foot Pavilion at Port Orange in Port Orange and the 750,000-square-foot Hammock Landing in West Melbourne.

The upside to these kinds of deals is that they split the risk between several developers and attract a better caliber of retailers, says Fawcett.

“The REITs don't only provide the money, they have excellent rapport with the national tenants,” Fawcett says. “We have rapport with the nationals [here too], but it's even stronger when you are doing it with a REIT.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.