Retail development has come to a halt.
The writing was on the wall. Some read it; others ignored it. Regardless of the strategy, retail development came to a halt in 2008. A few single-tenant buildings were developed, but most ground-up projects went into a holding pattern. Two years later, most of those projects are still on hold or moving very slowly at best. From power centers and mixed-use developments to strip centers and grocery-anchored centers, development activity remains stagnant throughout the Peach State.
Hardest hit are the secondary and tertiary markets where developers built shopping centers based primarily on residential growth projections. Unfortunately, those projected communities were never built. Many retailers in those markets have struggled, and some have closed their doors. As national retailers look for space again, shopping centers in those markets will be low on their list, furthering the decline of these centers.
How Will Developers Survive?
The old cliché — location, location, location — holds true. Developers with good projects in prime locations will make it through the cycle by adapting to the changing market conditions with the short-term focus on cash flow and long-term focus on value. However, several fundamental tactics are needed to survive this economic cycle:
• Asset Stabilization: One of the most important factors for survival is understanding the impact of the recession on an existing portfolio. An honest assessment of each property from the inside out is required to understand the strengths and weaknesses of centers and to gain a clear perspective of tenant struggles. Those companies that worked to stabilize their existing assets are better positioned to take advantage of market opportunities and will emerge with a strong team and portfolio that will be the first to put a shovel in the ground once the down cycle ends. Development activity will return in Georgia, starting with build-to-suits in late 2010 and early 2011. Spec retail development will most likely return in 2013.
• Team Alignment: While some developers are downsizing to ensure survival, other real estate companies are realigning staff to strengthen competencies to maximize capabilities. This requires a strategic combination of hiring and restructuring to establish the ideal leadership team.
• Transparency: Now more than ever, transparent relationships — particularly with investment and equity partners — are crucial. Open communication and transparent management strategies demonstrate a superior level of professionalism as well as a competency to manage short- and long-term challenges.
• Relationships Rule: Real estate is still about relationships, and the landlord/tenant relationship is one of the most critical in today’s environment. Landlords must be proactive, understand each tenant’s situation and identify lucrative strategies to support their success. A variety of initiatives work to support viable tenants and demonstrate a vested interest their success, including regular merchant meetings, retailer consultants who conduct evaluations and provide advice to help increase sales, newsletters with retail advice, and improved signage.
• Creative Leasing Strategies: Right now, retailers have leveraging power. The big question: Does a landlord offer concessions to keep them in the center or deny concessions at the risk of the tenant moving down the street?
Many owners, as well are retailers, are being creative with existing spaces and finding non-traditional uses for them. Tenants are getting aggressive deals on second-generation, especially big box, space that they can’t afford to build. Further, shopping center owners are structuring leases with short-term concessions and incremental increases aiming toward market rents by end of year 2 or 3, creating a win-win for both the tenant and the landlord. Much of today’s leasing activity accounts for tenants that have two or three existing locations and want to take advantage of landlord concessions to open their third or fourth store.
During this economic cycle, many factors reshaped and continue to impact the retail industry. The most significant factors include:
• Financing: The lack of available credit was the most significant factor that impacted the real estate industry. When banks froze the money, it became impossible to get a loan, causing a ripple effect through the entire retail real estate industry. However, permanent financing is starting to come back in to real estate. Some of the CMBS and life companies are relinquishing their stronghold on the money and making capital available. They have extremely stringent investment criteria. However, as time goes on and they have not allocated all their funds, their criteria will broaden. Additionally, some companies have partnered with private investors that provide capital to finalize loan workouts and stabilize properties.
• Retailer bankruptcy: The 2008-2009 fall-out of big box retailers such as Circuit City, Linens ’n Things and various junior tenants left significant voids in many shopping centers, dramatically impacting consumer traffic. Many local shop owners were forced to shut their doors, as slumping sales were not enough to sustain their business. This created a ripple effect of store closings throughout retail industry.
• Retailers Redefined: In addition to more strategic site selection, retailers are taking advantage of this crisis to find out exactly who they are. What is their niche? Who is their customer base? What value do they deliver? This type of evaluation will ultimately deliver a better product or service to the consumer as retailers get back to their core offerings.
Where Do We Go From Here?
Survival requires a combination of the right people with the right attitude, fresh thinking/strategic planning, capitalization and excellent execution. The good news is that national retailers are coming back into play. Market tours are being conducted to determine just the right store location as they anticipate a slower growth strategy in the coming years. Diligent site selection and discounted deals are the immediate plans for retailers.
Many factors will impact the real estate recovery: financing, consumer confidence, retailer sales, vacant space absorption, etc. There is no secret formula to bring retail development back more quickly.
Things will move slowly in the beginning, but every economic downfall in the United States did have an end — and this one will, too. The return of new development will be gradual once existing centers reach capacity. True market stabilization is anticipated for 2013.
— Andy Salomon is founder and partner at Pellerin & Salomon Real Estate Services LLC.