Retail Market Overview 2009-Featured in 1/09 Properties Magazine

Greed is not good Mr. Gekko. The bankers, retailers, and investors that listened to you are realizing their mistakes. It is too late for them to make it right. Instant gratification. The money is gone. Now what? Regret, remorse, resentment. Mr. Banker regrets not doing thorough due diligence on the property. Mr. Retailer has remorse for opening another store within three miles of two other locations, and investors across the country resent the commercial real estate sector altogether.

Black Friday numbers were weak and for many retailers, this will be their last holiday season in business. Several retailers had credit lines terminated before Thanksgiving and were unable to purchase inventory to sell during the holidays. Their fate has been sealed and liquidation is the only option. It comes as no surprise that U.S. retail store closures are at a six-year high and vacancy rates are expected to increase substantially. Regional malls and power centers are expected to experience the highest increase in vacancy followed by lifestyle and grocery anchored shopping centers. Northeast Ohio will experience vacancy increases in all counties making up the Cleveland Metropolitan Statistical Area. Asking rental rates are expected to fall by 20% or more and motivated shopping center owners could include tenant improvement allowances that will not be amortized into the lease. The landlord market that has existed since 2002, which drove grocery anchored centers’ rental rates into the mid $20’s for secondary markets and mid $30’s for primary markets, is no longer sustainable.

Unsophisticated or neophite investors acquired triple net leased assets in Northeast Ohio at a record pace over the past five years. The investment medium provided a predictable income stream and a fixed rate of return. Many of these triple net leased assets are occupied by casual theme restaurants, the single most affected retail sector in this recession. As casual theme restaurants file bankruptcy and reject leases, look for owners to try and replace the tenants with regional or local restaurant operators to take advantage of the existing infrastructure and maximize value. If a restaurant tenant cannot be identified, look for owners to return the property to the lender for the value of the land.

Retail activity will slow dramatically in 2009, except for a couple of retailers. Trends to look for will include, automotive aftermarket, discount stores, and contractually obligated franchisees actively pursuing and consummating deals in 2009. Expect new construction activity to be at the lowest levels in more than a decade. On a positive note there will be opportunities amid the recession. Shopping center acquisition opportunities will become more transparent in the first and second quarter of 2009. Investors familiar with purchasing mortgage instruments are the most likely beneficiaries of this real estate cycle. Investors with cash will have the opportunity to acquire discounted assets from highly leveraged organizations. In closing the recession will facilitate a correction that is necessary for a sustainable real estate market to prosper.

Northeast Ohio Retail Market Synopsis

2.11.08

The holiday season has come and gone and retailers have finished totaling sales for the year. Other than Wal-Mart, Costco, and Aeropostale there were few retail winners this year. This time of year retail executives decide which stores to pamper, which stores to relocate and which stores to close. Unfortunately, this year Northeast Ohio will experience a signifcnat number of store closings. Macy's has announced multiple store closings which should not come as a shock considering the locations identified. I'm surprised the locations at Rolling Acres, North Randall, and Canton Centre had not closed years ago. These centers have been deteriorating for several years even though Canton Centre had been somewhat redeveloped. In the event Macy's announces additional store closings, like Parmatown, Midway Mall, or Richmond Town Square I would be very concerned. These malls are the tier 2 malls in Northeast Ohio. Demographic changes, competitive projects closer to the interstate, and a general decrease in mall shopping has placed these assets in a tough environment when sales are good, what happens when sales are bad? Parmatown has been proactive and has added a Wal-Mart which should help generate more traffic, more often. Wal-Mart is out on an island on the west end of Parmatown and it will be difficult for the smaller retailers to feed off the traffic Wal-Mart is generating. Midway Mall continues to struggle because of competition from Avon, Lorain and Amherst. The fact that the Route 57 interchange onto Midway Mall Blvd or Griswold has not been reconfigured attributed to the demise of this trade area. Dillards has closed and sold the property to Centro. Wal-Mart has plans to relocate to a supercenter however plans appear to be on hold. Richmond Town Square is having problems with teenage loitering.

The hardest hit from this economic downturn are restaurants. Casual theme restaurants serving the middle-income population are getting killed. The middle-class does not have the money or choose not to spend their money eating out on Friday and Saturday nights. More likely they are renting movies, ordering pizza, and staying home. Several national restaurant concepts have announced store closings including; Lonestar, Buca Di Beppo, Darden, Don Pablos and Joe's Crab Shack. In addition to the casual theme restaurants fast food or quick serve operators have announced closings. Donatos, Steak N Shake, and Wendy's are a few who have already closed Northeast Ohio stores.

Retail Market Overview 2008

Retail developers have built one million square feet or more annually for the past five (5) years in Northeast Ohio. This has kept retailers, leasing agents and the brokerage community very busy filling space. Our research indicates that there are a few projects that have broken ground or will break ground early next year; The Plaza at SouthPark in Strongsville, Deerfield Crossings in Amherst, Bridgeview Commons in Garfield Heights, however the bulk of the retail activity has been absorbing existing retail space. The majority of the vacant space left by Tops Grocery stores was absorbed by Giant Eagle. The availability of the Tops real estate was also a factor in less grocery anchored shopping centers being built than in previous years. The big box retailers continue to actively identify in-fill and relocation opportunities. Wal-Mart has opened a SuperCenter at Steelyard Commons which shall fill a retail void on the near south side of Cleveland. Target opened on West 117th on the Lakewood-Cleveland border which filled a retail void on the near west side. Giant Eagle will soon join Target on West 117th. It’s too early to determine if the retailers will exceed expectations in these markets, however if the sales projections are met or surpassed you can expect additional retail development in the City of Cleveland as well as the first ring suburbs.

Developers are pursuing referendum initiatives in Boston Heights, Broadview Heights, Orange, and Solon. In the event these developers are successful Northeast Ohio could experience more than one million square feet of new construction in 2008. Additional speculative development has been proposed for Cleveland’s Central Business District and includes The Flats East Bank project proposed by Scott Wolstein and Bob Stark’s Warehouse project. Mr. Wolstein’s project has cleared several obstacles over the past year and Bob Stark’s vision and success in the suburbs bodes well for his planned project downtown.

The City of Cleveland is blessed with active community development organizations. Several CDC’s are undertaking major renovation projects in their neighborhoods. Northeast Shores Development Corporation is in the process of redeveloping the Waterloo District. The Detroit-Shoreway CDC created the Gordon Square Arts District. Both of these projects are worth mentioning because of their impact on the local neighborhood. These projects are located on the major arteries that serve each neighborhood and are positive first impressions. I anticipate that both projects will be a catalyst for new urbanism and ultimately will lure residents from the suburbs back into the City.


For additional information regarding the CDC progress, go to www.northeastshores.org or www.dscdo.org.


2008 Trends
• Consolidation in the Financial Services Sector
• Big Box in-fill and relocation
• Shrinkage in the causal theme restaurant industry
• Increased mixed use developments using universities as the anchor
• Redevelopment of major arteries serving neighborhoods in the City of Cleveland
• Increased environmental awareness and green initiatives
• Strong sales projections for Home Improvement Retailers
• Rental Rates should increase slightly
• Investment activity to remain strong, significant number of foreign buyers

2007 Retail Report

The year of 2006 can be remembered as a year when developers and retailers made a commitment to investing back into the City of Cleveland. Total new construction accounted for an additional 2.8 million square feet of retail in Northeast Ohio, more than one million of which was built in the City of Cleveland. Our research indicates that this trend will continue and that additional retail will grow in neighborhoods like, Collinwood, Cudell-Edgewater, Little Italy, and West Park. This doesn’t mean that developers will abandon the suburbs, county seats or bedroom communities in Northeast Ohio, quite the contrary developers will continue to focus on developments that provide the path of least resistance from municipalities and the greatest returns. In addition several communities in Northeast Ohio are vying for what may be the southern compliment to Legacy Village and Crocker Park. Brecksville has the greatest chance of landing a lifestyle development due to its’ excellent demographics and interchange access. If past history is any indication of the future the residents of this community would rather the project be developed in someone else’s backyard.

The Greater Cleveland retail market has surpassed more than 75 million square feet of retail space accounting for more than 22 square feet of retail space per person. This amount is slightly higher than the national average of 20.3 square feet per capita. That being said most of the counties that comprise Northeast Ohio have very healthy occupancy rates. The healthiest county is Lake County with a vacancy rate just over six-percent (6%), followed by Medina County at seven-percent (7%). The low vacancy rates in these counties can be attributed to above-average absorption, sustainable developments and the lack of large functionally obsolete malls like those found in Cuyahoga and Summit Counties. There is one county that has an alarming vacancy rate of more than twenty-percent (20%); Geauga County. However, projects in Bainbridge and Chardon have added more than a million square feet of retail in the last three years. Geauga County’s gross leasable area (GLA) is north of 2.5 million square feet, so these projects account for almost half of all the GLA in the entire county. Assuming residential sprawl continues and shopping center owners aggressively market their properties, I anticipate the vacancy rates in Geauga County to be significantly lower next year.

A lower vacancy rate is only one of the trends likely to occur in 2007. There are several trends to be prepared for in Northeast Ohio. In no particular order I have summarized the trends that will have the greatest impact on the retail real estate market.
• Discount Stores will try to reposition. Box stores will be active relocating stores when they do not own their own real estate and/or cannot expand into a larger format on the existing site. Box stores will also be active in county seats as well as in-fill markets.
• Both Drug stores and gas stations with the convenience store component will be aggressively opening new locations
• Single tenant NNN leased assets will continue to be a desirable investment vehicle, obtaining in some cases sub-7% cap rates.
• Retail shopping center sales should increase as investors pursue alternative product with better forecasted returns such as apartments and industrial buildings.
• Moderate to low rental rate increases.
• Operating expenses will increase as owners try to make up for low to moderate rental rate increases.
• Regional malls will continue to maximize land density ratios in order to compete against Lifestyle centers.

Construction Survey

Chain Store Age recently published an article regarding rising construction costs due to increases in price for raw materials. Below are the results of the survey. In the event you would like to read the entire article please email me and I will send a PDF of the entire article.

Shell Costs (including concrete, structural steel, structural masonry, roof and heating, ventilation and air conditioning but excluding interior fit out.

Specialty Retailers $48.60 per square foot
Supermarkets $43.59 per square foot
Big Box Stores $41.26 per square foot
Drug Stores $40.67 per square foot.

Improvements (Average for all retailers)
Fixtures $8.05 per square foot
Flooring $2.97 per square foot
Lighting $2.50 per square foot
Ceilings $1.99 per square foot
HVAC $1.55 per square foot
Exterior Signage $.93 per square foot
Interior Signage $.61 per square foot

Dog Days of Summer

The first day of summer was last week which means vacations, graduation parties, and a tougher time to conduct business. Golf outings, half-a-day Fridays, and late start Mondays become increasingly more common. However, a significant amount of retail activity is occurring throughout Northeast Ohio as the weather is good, except for a few T-Storms. Below is a synopsis of activity.

1. The major infrastructure improvements are under construction at Steelyard Commons.
2. Multiple mixed use developments are getting significant PR time. Rockside Terrace, The Arborlands, and North Royalton Town Center would all love the tenant mix afforded to Legacy Village or Crocker Park. Don't expect another Crocker Park in Northeast Ohio unless a developer is able secure land near the Fairlawn market. The Akron/Canton market could support a lifestyle center on it's own, although finding the right piece of land will prove the most difficult.
3. Why all the interest in downtown Cleveland? Robert Stark and Scott Wolstein are both pitching mixed-use developments (with large retail components) in downtown Cleveland. One reason could be related to the faltering Tower City Center. In addition the downtown housing market has grown significantly over the past five years.
4. Most of Westgate Mall has been razed and construction is progressing quickly.
5. Secondary sites are being absorbed. A significant number of sites previously rejected by the real estate committees of retailers are being developed. Shopping center owners and developers may want to revisit secondary sties that were previously rejected by the retailers.
6. Immigration is at the forefront of most media news programs. Northeast Ohio is experiencing its own immigration of out-of-state developers and end users coming into the market. The additional competition will increase land values, accelerate the demise of out-dated projects and provide the consumer with a better shopping experience; hopefully.
7. The value is in the real estate. Just ask private equity firms looking to acquire retailers. Private equity firms are teaming up with REITS and going at it solo to control the real estate assets of many retailers. Expect that trend to continue so long as the retailer owns their real estate or is under market on the leasehold.

Fifth Third Bank Continues Aggressive Growth

CB Richard Ellis represents and assists Fifth Third Bank with the execution of their real estate strategy in Northeast Ohio. As Fifth Thirds' representative in Northeast Ohio I have negotiated several acquisitions on their behalf. Fifth Third has recently opened new locations in Maple Heights, West Park, Broadview Heights, and in Lyndhurst at Legacy Village. Several additional sites are in the due diligence phase of the contract and are progressing according to schedule.

Fifth Third has a big appeptite for real estate right now throughout Northeast Ohio, including sites within the City of Cleveland borders. The ideal site is 225' x 225' in dimension, on a corner, and the bank will only purchase. If you have a site that fits these requirements, please give me a call.