STRENGTH AND WEAKNESS IN RETAIL

;s-

Aside from the unique design andthe fact that construction is mov­ing forward at such a difficult time,Fogel points out that the project is alsounique in the fact that Tilden Ridgehas not been financed by any sort sub­sidy or public financing.

"In this market, we are very proud tobe able to bring this project to fruitionwithout needing tremendous amountsof public- funding/" says Fogel.

Although Ironwood has two suc­cessful projects going in the area rightnow, Fogel does not feel that recoveryis just around the corner for the retailsector.

"Certain retailers are still doing ok,but they are not projecting the type ofgrowth that we have seen over the last10 years/" he says. "Some retailers likeWal-Mart and Lowe's are still doingdeals but very, very few deals./I

Since new development has taken aslide, Fogel notes that moving forwardulany retail developers are focusingmore on the redevelopment of exist­ing centers. This refocus is also dueto the fact that much of the Philadel­phia region has becolue saturated withlarge-scale retail centers.

John Azarian of New Jersey-basedThe Azarian Group, which owns,manages, and develops retail centersthroughout New Jersey, agrees. Henotes that his team is turning theirfocus this year to renovation. His COln­

pany is currently working on threemajor renovations that are slated to becomplete in the next .12 months withtwo other projects set to start in early2010.

"I think it is a great time to strength­en your existing holdings, invest inthose holdings and make them strongfor the turn around and to keep yourproperties viable/" he says.

In the New Jersey area, Azarian iscurrently working on renovating Allen­dale Shopping-Plaza in Allendale, NewJersey. The 90,OOO-square-foot shop­ping center will feature a S,OOO-square­foot expansion upon completion. InSayreville, New Jersey, the firm is reno­vating Raritan Center, a 75,OOO-square­foot retail center that will feature theaddition of a new 10,OOO-square-footpad. Both renovations not only includeexpansions, but extensive interior andexterior renovations that include newfacades, sidewalks, parking lots, land­scaping, lamp poles and curbing.

LEASINGRetail leasing has certainly taken

a llit all over the cOlmtry as retailersscale back expansion plans due to thetumble in the economy. In the Phila­delphia/New Jersey area, dense demo­graphics has helped bolster activity,but interest from national retailers hasstill lagged despite the area's excel­lent fundamentals. On a positive note,

. however, Azarian explains that wlule

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certain requirements set by the town­ship.

"One of the most important featuresof the project from the town's per­spective was the aesthetics/" explainsFogel.

This concern resulted in a veryunusual and unique design for theWal-Mart.

"They [the townsllip] really were inlove with the design of the Cabela'sstore and thought. it was extremelyattractive and situated really nicely intheir town. And they wanted our ten­ants to lllil1uC that image/" says Fogel./lWal-Mart came up with a design thatwe had certainly not ever seen./I

The new Wal-Mart store featuresearth tones, stone, wooden structuresand other design elenlents that wouldbe cOn1.plelnentary to an outdoorwoodland setting.

The Lowe's prototype was alsochanged to fo11o\-\7 the aesthetic require­ments of the town. Stone was addedand the retailer made changes to someof the I1laterials and colors they gener­ally use, so the new 156/000-square­foot box could also blend in with thethenle of the center.

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three small spaces. Fogel notes thattwo of the. spaces are already underlease negotiations.

Ironwood is also working on a newproject in Tilden, Pennsylvania - Til­den Ridge. The firm recently purchased63 acres of land for the construction ofthe 400,OOO-square-foot regional shop­ping center.

Ironwood was attracted to the Tildensite because of the success that the newCabela's was having. Tilden Ridge willbe located at a popular and busy inter­change next to the Cabela's site, whichis clainling to bring 7 lnillion peopleper year to the store and is one of theoutdoor retailer's strongest stores.

Slated for a fall 2010 opening, thecenter will feature a 152,OOO-square­foot Wal-Mart, a 156,000-square-footLowe's Home Improvement Store,60,000 square feet of inline retail andfive free-standing parcels. The site issituated at the intersection of Route 61and 78. GleIUl Marvin of Metro Com­Inercial Real Estate is handling theleasing for the center.

Although the Tilden project did notpose as luany challenges as ExeterCOlllmons, Ironwood did have to meet

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RETAIL from page 1number of problems that were causedby existing growth that were neversatisfied with new roads."

Together with joint venture part­ner/ The Goldenberg Group, Ironwooddecided to take on the project andbegan the arduous task of making thenecessary changes to the roads aroundthe site.

"There was a great demand for retailby retailers and by the township as"veIl. The township was aware of thefact that they were lmderstored, and astudy that was provided by the countyidentified a number of retail sales thatwere leaving the region just becausethere were not enough businesses/services locally/If explains Fogel. It wasa win/win for everyone. If we did nothave everyone from the cOlmty, town­ship and state supporting the projectvve would not have been able to securethe funding for the road improve­ments."

Exeter Commons features a132/000-square-foot Target and an81/000-square-foot Giant Foods. Targetopened at the end of July and the GiantFoods Store opened inAugust. The cen­ter will also include a 171/000-square­foot Lowe's Home Improvement Store,which also opened its doors in August.Other tenants include Wells Fargo/Wachovia, Red Robin, Chick-Fil-A,Affinity Bank and a l,600-square-footSONIC Drive-In. Upon full comple­tion/ the project will be the largestshopping center in Exeter Township.

The center was also slated to includea 20,OOO-square-foot Circuit City, butthe lease was terminated prior to theelectronics retailer's bankruptcy. Asidefrom this box, Exeter COffilUOns was allbut leased IIp. To fill the space quickly,Ironwood sliced the box space into

20 . NORTHEAST REAL ESTATE BUSINESS - AUGUST/SEPTEMBER 2009

asking for more equity to be put intothe deal.

"That presents a problem. You havea $100 million deal with $75 millionworth of debt on it and the lenderwants the owner to put up another$10 or $15 million. If the owner hasseveral of those types of transactionscoming due, they will have a real prob­lem because they may not have thatmoney," he says.

Munley points out that many pri­vate investors are able to bypass theissue of finding available financing alltogether by paying cash.

"Many buyers are trying to use thatas an advantage over the competitionby showing that they can close all cashand they do not need a banking rela­tionship to get it done," Munley says."The Princeton deal that I mentionedhad four all cash offers."

He adds, "The private money isbeing very, very aggressive. They real­ize that it is a great tune to be a buyer,but they also realize it is a decent timeto be a seller because if you can get ina cash position there are going to bemore opportunities that arise."

Despite the economy and generaloutlook of the conSUlner, there are sev­eral key reason that sales are bouncingback for prime retail properties.

"When you look at some of thesestronger markets, there is still going tobe tenants there and there is still goingto be retail there because there are con­sumers that have needs that still needto be met:' says Munley.

IIAlso, irtvestors need to put theirInoney sonlewhere and they don'twant to keep it in the bank making 1to 2 percent when they can put it inreal estate and get some tax apprecia­tion and benefits and make upwardsof 10 percent on their money," Munleyadds. 0

dynamics of a deal and leasing has alot to do with it.

''It is just the simple fact that a lotof tenants have gone out of businessand there are not enough retailers tofill those spaces. That is really wherethe perception is coming from," hesays~ "If someone financed incorrectly- they may have a 90 percent loan inplace and it was a fully occupied deal,but they lost a major tenant becausethey went bankrupt - they are nowunderwater on their debt payments.If that is the case, the problem that weare seeing is that those rent levels thatwere set previously, you are not goingto get that today."

"Right now it is all about the under­writing. Any property makes senseat some number. It just needs to beunderwritten correctly," he adds.

Because of this, Munley explainsthat the price per square foot of a prop­erty is becoming just as important asthe cap rate.

"We are really looking at price perpound now and buyers are not goingto pay for more than what they thinkthe bricks and sticks are worth," notesMunley.

Those that are buying retail proper­ties have changed as well. Institutionalbuyers are out and private buyersare in. French notes that one reasonsome institutional buyers are out ofthe investment sales market at themoment has more to do with refinanc­ing existing assets than purchasingnew ones.

"Some institutional buyers are hav­ing problems with what they alreadyhave. They are not necessarily in finan­cial trouble but they are trying to dealwith debt that is coming due - thatis a real problem," says French. "Theyhave to figure out how to refinancethat debt."

French adds that even if a lender willgive an extension on a loan they are

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"The interest and activity was unbe­lievably high and it was somethingwe have not seen in 2 years," saysMunley.

While interest in small strip centersin prime locations is certainly increas­ing, it is also an indicator of where themarket is still lagging behind - largerretail centers. French notes that this notdue to lack of supply or demand, but alack of financing. Currently, buyers areable to obtain loans for up to roughly$10 million from their local or regionalbanks, but more than that can prove tobe difficult.

"Deals in the $5 to $10 million range- we can do those all day long,"says Munley. "We have a tremen­dous amount of interest, people haveenough cash for a down payment andthey have a strong enough bankingrelationship where the banks are notover extending themselves."

French notes that much more strin­gent underwriting standards is alsohindering buyers and sellers frommoving forward with some deals.

"Lenders are not just dealing withcash flow and cap rates - they arelooking at the legs of the deal andwhere they think the income revenueis going to be over the next 4 to 5years," he explains. "They may say aparticular deal is a 9 cap, but basedon the income in place it is really at10.5 to 11 cap with the underwritingin place."

French says that lenders are lookingfar into the future when underwritinga transaction. For example, if a centerhas a Blockbuster or a Rite Aid, whichmany feel are struggling in the cur­rent economy, a bank may remove theincome for those stores or reduce itbecause it may fear those tenants maynot be there a year or two down theroad.

Munley agrees that stricter under­writing has completely changed the

activity has dipped on the nationalside, the mom and pop type retailersare picking up much of that slack.

"We have had a tremendous up tickin leasing activity over the last 2 or 3months and we have been signing onthe average at least one lease per weekin various properties, but all of thatactivity is from mom and pops and notfrom any of the nationals," he says.

The uptick in activity from mom andpop retailers most likely stems fromthe fact that the majority of the activityis taking place in smaller neighbor­hood strip centers. Azarian, who ownsand manages retail strip centers rang­ing from 10,000 square feet to 130,000square feet, says that the type of tenantthat he has been signing leases withhas varied from week to week, rangingfrom a carpet store, a fitness facility, apersonal training retailer, an upscaleItalian deli, as well as medical andoffice space.

Although Azarian is still leasing outhis space, he does note that whilerental rates have stayed the same hehas had to increase concessions. But,he has not had many tenants trying torenegotiate rents.

"The retailers that I am hearing fromare the ones that are saying they havebeen affected by the economy, but theyare really in the minority," he remarks."For the most part no news is goodnews."

Aside from the slow down andchange in leasing dynamics, Azariandoes believe that the retail sector isstarting to recover.

"I am generally a positive and opti­mistic person and I believe that weare definitely coming out of it. I don'tthink it was as bad as everyone saidit was," he notes. I think we are defi­nitely in the turn around."

INVESTMENT SALESAlong with development and leas­

ing, retail investment sales are on thedecline as well. Joe French of SperryVan Ness, who focuses on retail invest­ment sales in the Metro Philadelphiamarket, says that the sale of strip cen­ters has dropped 90 percent over lastyear's volume and the sale of mallshas dropped 79 percent compared tolast year.

"Things have come to a halt, butthere is a fair amount of product onthe market," says French. "Probablymore than there was in 2008, but theproblem is that sellers and buyers can­not get together on price."

However, Chris Munley of Marcus& Millichap, who covers Central andSouthern New Jersey, has seen someuptick in sales, but this has been froma very specific product type and pricerange - smaller strip centers priced$10 million or less. Mtmley recentlylisted a property - a 20,000-square­foot strip center in the Princeton sub­market - that within two weeks onthe market already had 16 offers withseveral of those offers at list price.

AUGUST/SEPTEMBER 2009 . NORTHEAST REAL ESTATE BUSINESS. . _ ,21