Some retail markets overbuilt, but opportunities still exist

Real Estate Weekly, Oct 22, 1997

"When we are appraising a property, we are reluctant to recommend new construction in areas where population growth is slow," Latella said. "High growth areas such as Phoenix, Atlanta, Seattle, Denver, Raleigh/Durhamand Charlotte will continue to have a need for new product." However, exceptions do exist for well-conceived product with the basic fundamentals of good location, strong tenancy and project differentiation, he added.

Latella provided a synopsis of the potential for investment in the following product types: inner city/urban development, neighborhood and community centers, outlet centers, regional malls, power centers and mega malls.

Inner City/Urban Development

The Cushman & Wakefield executive saw this as one of the great opportunities for retailers and investors. "There has been a regentrification of many downtown areas," he said. Until recently, retailers have been reluctant to enter these areas because of the high cost of occupancy. Now, the refurbishing of such neighborhoods as Midtown Manhattan's Times Square are increasing interest in downtowns.

"One Times Square recently sold for $1,000 per square foot, and that was basically a retail and signage play," Latella said. "It's the ultimate testimony to the renewal attraction of what was once a blighted area. We are seeing downtowns being revitalized in other cities as well, such as Boston, Chicago, San Francisco, and Seattle."

Neighborhood and Community Centers

These centers provide an attractive retail format: typically, a discount department store, a supermarket and several satellite tenants. The centers tend to be in a suburban setting and rely upon their convenience to area residents. Larger projects with a deeper tenant mix will draw from greater trade areas.

"In affluent suburban areas, these types of centers can be excellent investments," Latella said. "New construction on these types of products is occurring in many areas."

Outlet Centers

These types of centers are typically well distant from urban areas, which is a key problem for many investors. "They're the weakest type of center, from a real estate investment standpoint," Latella said, owing to the fact that the market for this product type is more limited. "With their remote locales, if they fail as outlet centers, there is limited alternative use."

Regional Malls

This is a very bifurcated market. There has been a great deal of buying and selling of malls, with REITs being the primary purchasers. "REITs are tending to buy at lower prices than the institutions did in the late 1980's and early 1990's," Latella said. Returns have been in the 9 to 10.5 percent range based on in-place income.

Very few Class A malls are on the market fight now; most of the product is A minus and B grade. Sales activity, however, is at the highest pace in recent memory.

Power Centers

The "category killers" are one major area of overbuilding, according to Latella. As a result, investors are shying away from the power centers, he said, adding that the concept can work in the high population growth areas of the South and the Pacific Northwest.

A fundamental difference between the power center and the neighborhood center is that the large tenants in a power center sign longer leases, and thus create a flatter income stream. The trade-off can be better credit quality.

"There's a fight for dominance in this category, and there's a chance some players won't survive," he said.

Mega Malls

"A limited window of opportunity" exists for those investing in mega malls, according to Latella. The U.S. can only support 40 or 50 such retail facilities, he said. Mega malls generally have 8 to 20 anchor or junior anchor tenants and 175 to 230 specialty stores, off-price stores, category dominant stores, specialty shops and entertainment, such as theaters, theme restaurants, virtual reality concepts and interactive media outlets. They tend to be located in proximate to top 50 metropolitan areas.