closing 500 stores by mid-2009. it announced this month, plans to close about 160 stores,
While all the commercial real estate sectors are suffering from the capital market freeze, retail developers must also contend with occupancy and rent projections that are looking more and more grim. "Right now retail is in the crosshairs of two trends: a slowdown in leasing due to slow retail sales, and a capital market that is reluctant to lend," says Ray Cirz, CEO and managing director of Integra Realty Resources. He points to an iconic lifestyle center on the eastern seaboard that has been reluctant to issue a date for a grand opening. "Construction is complete and they have signed a number of major anchors but they are having trouble filling the inline space," he tells GlobeSt.com. "Leasing has been that slow."
It hasn't helped that retail is heavily dependent at all levels for debt financing to get these projects off the ground, David Jacobstein, senior advisor at Deloitte's real estate practice, and former president of Developers Diversified, tells GlobeSt.com. "Now, where there is debt financing available it is at much tougher underwriting standards – LTVs have gone to 60 to 65% down from 80%."
The situation could well worsen as sector fundamentals decline, he also warns. Rents haven't moved too much yet, Jacobstein says, "but there will be a time when rents are pushed, landlords will not have the upper hand."
Also, vacancy rates are bound to rise as well. "There will be some pressure on occupancies as the year proceeds into 2009, but there is a lag because of long-term leases which average 3-10 years." Many companies won't close stores until the lease is mature, he notes.
Tenants are also becoming very skittish about committing to projects, according to Keith Tickell and Eric Swanson, principals with the Flagler Development Group. "In the retail that we have encountered in South Florida, there are two things that jump out: tenants are slowing down or delaying commitments to tenancy. And they are getting more and more selective about the rents that they will pay," Swanson tells GlobeSt.com. "The decision-making process is taking longer as a result, although good projects are still relatively immune from these trends," he adds. "Those are still attracting tenants who are willing to make commitments."
Perhaps a more positive question to ask, instead of how bad it will get, is when will the downturn end. Unfortunately, 2009 as a recovery date is looking less and less likely, at least from Tickell's perspective.
"Everybody wants to believe that the real estate markets will turn around in '09," he tells GlobeSt.com. "But retail will have a more nuanced recovery than that. For starters, I think it will be tied to a recovery in new home delivers and that will take some time to work through. What has become apparent is that the areas with the new developments will be much slower to recover and retail won't be there for a long time."
One factor in the sector's favor, Deloitte's Jacobstein says, is that retail is healthier this time around than in past economic downturns. "Stores have more sophisticated inventory control systems in place, for example, that allow them to quickly adjust plans and hold their margins."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
