COVER STORY, SEPTEMBER 2008

STRONG FOUNDATION IS KEY
The retail sectors in NJ and Philly are holding up.
Stephanie Mayhew

One word that seems exemplify the retail sector in the Northeast is cautious. Some retailers are taking a pause and holding off on expansions, a few developers are putting new projects on the shelf for the time being, financial institutions have tightened their lending standards and consumers are tightening their grips on their wallets as prices rise. To get an even clearer picture of the retail market in the Northeast, we spoke with several brokers that work within two of the Northeast’s densest markets — Philadelphia and New Jersey.

New Jersey

Fasano

In New Jersey, according to our panel of experts — Matt Harding, president and chief operating officer of Levin Management; Michael Fasano, regional manager of Marcus & Millichap’s New Jersey office; Matt Krauser, director of Integra Realty Resources’ Northern New Jersey office; and Anthony M. Graziano, director of Integra Realty Resources’ Coastal New Jersey office — the retail market has softened and leasing velocity has slowed some what due to the economic climate, but there is still a healthy amount of activity taking place because of the state’s attractive demographics and its high barriers to entry.

While some retailers have scaled back expansion, Harding says, “There are some retailers that are still expanding. We are regularly executing new leases with retail tenants throughout the state at our properties.”

Fasano concurs, noting that, “Good locations with strong foot traffic counts at signalized intersections in dense suburban markets such as Middlesex County in Northern New Jersey and other suburban markets in Essex, Morris and Bergen counties are still being sought after by retailers.”

Vacancy rates for retail centers have remained at a healthy rate, 5 percent in Bergen County, for example, but retail rates have flattened out, and some landlords have begun to offer concessions on space in Class B and C properties.

Retailers that are expanding include big-box giants such as Wal-Mart, Costco, BJ’s Wholesale Club and Sam’s Club, as well as supermarkets and drug stores. It can be said that the continued expansion of these retailers is reflective of the general outlook of today’s consumer.

“The retailers that developers want to work with right now are those that sell necessity items,” says Fasano. “Other retailers want to be aligned with stores such as Walgreens or CVS/pharmacy because in good times and in bad those stores are going to perform. But, on some bigger ticket items like furniture, clothing and electronics, you are going to see more of a waiting game by the consumer.”

Developers that are currently leasing space in new centers are not the only ones aware of this trend. Harding’s firm is currently working on retenanting Princeton Foresstal Village in Princeton to serve the community and not just the daytime population of workers that are part of the mixed-use development. New tenants include Salt Creek Grille, Ruth’s Chris Steakhouse, and Can Do Fitness, a 70,000-square-foot gym.

“We have created a nice mix that works for people that work in the area and the area residents,” says Harding. “Many owners are doing this sort of thing. Rather than developing something new, they are taking their older projects and reworking them to fit the surrounding neighborhood.”

Graziano

Another type of retailer that is on the hunt for space in New Jersey is the baby store. “If you look at the census information not only for this region, but in the larger national market, we are having somewhat of a baby explosion,” says Graziano. “Babies “R” Us is the leader in the market, but TJ Maxx just picked up a company called Bye Bye Baby, and both are looking for space.”

The advent of baby stores in New Jersey should hopefully help solve a current problem plauging some of the area’s older neighborhood shopping centers with typical 20,000- to 30,000-square–foot anchors. As grocery stores have increased in store size, these smaller neighborhood retailers are starting to feel the pinch.

“This size of anchor space is too large for your mom and pop type of store, but too small for the prototypical supermarkets, which today are now 60,000- to 80,000-square-foot stores,” explains Krauser. However, the baby stores happen to fit right into this gap.

Graziano notes that overall, “There is just a lack of tenants for that space. Many of the midline apparel companies such as Fashion Bug that used to be able to take up that kind of space are just not in business anymore,” he says. “Even tenants such as Marshalls and TJ Maxx, that might have at one time taken up that kind of space, have simply outgrown it because they are now 60,000 to 70,000 square feet.”

The big-box expansion mentioned above is also filling a gap in the New Jersey retail market. Often, the state’s high barriers to entry can be a major hurdle for development, but big-box retailers have found an edge in New Jersey

Krauser

“The benefit of these big box retailers is that they can be built on brownfield sites or former industrial sites much more quickly and cheaply than other uses, such as residential,” explains Krauser. “The municipalities are happier to see these type of users because they are turning a site that was formerly contaminated into a destination location and a good tax rateable for the town.”

Sites such as these include the Xanadu project in Northern New Jersey, which is set to be a major destination location for the New York/New Jersey metropolitan area, as well as a tourism draw.

“Depending on the success of Xanadu, we might see other large-scale entertainment and shopping centers like it throughout the state,” says Krauser. Other redevelopment sites for major retail projects include the old National Lead site in Sayreville in Middlesex County and the Ciba-Geigy plant site in Toms River in Ocean County. “SERA (Sayreville Economic and Redevelopment Agency) is in the process of cleaning up the National Lead site for a major mixed-use hub,” says Krauser. “It is right off of the parkway and could contain approximately 1 million to 2 million square feet of retail.”

At the Ciba-Geigy site, provisional plans call for an approximately 1,250-acre redevelopment, featuring a large commercial and retail component. Both of these developments are currently in the conceptual phase with 10-year development timeframes.

The development climate has certainly changed, as many developers are revising their plans to fit the current marketplace or they are focusing on projects that would come out of the ground much further down the road.

“From 2003 through the first quarter of 2006, the saying ‘build it and they will come’ was very true, but now developers are inclined to make sure they have leases and commitments before they start putting the bricks and sticks together,” says Fasano.

Graziano notes that there has been a drop in new development approvals over the last year as a result of the slow leasing market, but Krauser believes that the slow down in development is not just a result of the slow down in leasing activity.

“There has been some duplication in the retail sector in New Jersey. You can only have so many restaurants, banks, and big-box retailers,” he says. “Over the last few years, as the market started to get really hot, there was an influx of retailers and their competitors in the same markets, but due to the current state of the economy and the lack of disposable income, retailers are starting to feel the brunt of it.”

Harding

Of course, financing has also had a hand in any future retail development. “The availability of financing has changed dramatically over the past year, so that has an affect on projects that are not as far in the cycle in terms of approvals, preleasing and financing,” explains Harding. 

The lack of capital has hindered the retail investment sales market in New Jersey. “Velocity has certainly been impacted by the uncertainty in the marketplace and by the issues that have plagued the capital markets, but we are still seeing keen activity and multiple offers for assets that are in solid communities, so the quality product still remains highly favored,” says Fasano. “However, Class C retail properties have their share of problems, which have impacted the pricing on that level of an asset.”

Harding adds, “There are also fewer properties on the market,” he says. “Investors are being cautious and are waiting for things to shake out a bit and waiting for the credit markets to ease up a bit.”

Philadelphia

Pasquarella

It is no surprise that the landscape of the Philadelphia retail market closely mirrors New Jersey’s. Similar to its neighbor in rich demographics, many of the same national retailers and identical lending woes, leasing activity and new development have slowed and financing is tight in this dense region as well. However, like its neighbor, our panel of Philadelphia experts — Richard L. Soloff , executive vice president and partner at Colliers Lanard & Axilbund; Brad Nathanson, a director of Marcus & Millichap’s National Retail Group; Joseph D. Pasquarella, managing director of Integra Realty Resources in Philadelphia; and Kevin McClernon, senior vice president of CB Richard Ellis in Philadelphia — agree that the Philadelphia market contains strong fundamentals that keep it fairly healthy, even in the midst of a down turn.

“The economy, of course, has affected the retail market, but Philadelphia, compared to other regions around the country, is faring rather well,” says Pasquarella. “Compared to the nationwide vacancy rate, which is 8 percent, Philadelphia, across the board, is closer to 6.5 percent. Even in comparison with all of the Northeast, which has a roughly 7 percent vacancy rate, Philadelphia is doing very well.”

The relative health of the Philadelphia retail market has to do with an array of factors, the strongest being that it is a conservative market with a low unemployment rate. “Lending is conservative and developers are relatively cautious. There is good solid investing backed by top investors, so there really hasn’t been a shakedown in tenancy that would cause the vacancy rate to increase,” notes Pasquarella. “Philadelphia does sometimes lag compared to rest of the country, so when there is an expansion mode, Philadelphia is a little late to the party, but on the other hand, when things are going down it tends to hang in on the positive side.”

Retailers that sell necessity items continue to reign in Philadelphia as well. Grocery stores and drug stores continue to expand, appearing much less susceptible to the economic downturn. Wegmans continues to dominate the retail market in the Northeast and the grocer’s growth has been significant in Philadelphia as well. Wegmans is set to open in several new developments currently in the works including Providence Town Center, a 725,000-square-foot hybrid center located in Collegeville, Pennsylvania; and Uptown Worthington, a 1.6 million-square-foot mixed-use development underway in Malvern, Pennsylvania.

Soloff

Quick-serve casual restaurants are also gaining ground in Philadelphia. Pot Belly Sandwich Works out of Chicago, Chipotle and Panera Bread are all making headway in the market. “These quick-service, less expensive restaurants are doing well while many of the full-service, sit down restaurants have slowed significantly,” says Soloff. “People are trying to save some money and they are busy, so as the full-service restaurants struggle around the country, it has created a good opportunity for the quick-serve restaurants to pick up some steam.”

Like New Jersey, big-box retailers are continuing to expand in Philadelphia as well. However, some of those power players are scaling back. “Wal-Mart and Lowes are actively doing deals in the Philadelphia market; however, Target, which was on pace to do 21 stores in the MSA, recently announced that they are shutting down 12 out of those 21 locations from moving forward,” says Nathanson. “It has kind of caught developers in mid stream that were moving forward with approvals and land development.”

And while some fashion retailers have taken a bit of a hit, clothing stores dedicated to teens and tweens are still holding their own, according to Pasquarella. With babysitting and lawn mowing money burning a hole in their pockets, retailers that cater to this demographic seem to be more recession proof than those catering to adults.

At the other end of the spectrum, given rising energy prices, some owners and developers believe that regional malls are going to be a decent bet. “They are usually well anchored, which is a big draw, and many of them are also under renovation,” says Pasquarella. Developers that are renovating many of the Philadelphia malls believe that because of the high cost of gasoline, people will go to one center, park the car, and get their shopping done all in one place.

Pennsylvania Real Estate Investment Trust has been busy renovating several of their mall sites throughout the Northeast. Major renovations are almost complete on the Plymouth Meeting Mall. Located in the greater Philadelphia area just northwest of the city in Plymouth Meeting, the mall is situated on Germantown Pike at the confluence of three major traffic arteries that include the Pennsylvania Turnpike, its Northeast extension and the Blue Route, which allows the center to serve a plethora of greater Philadelphia’s residents. Construction began spring 2007 with the demolition of the former 160,000-square-foot IKEA store to make way for a 140,000-square-foot addition to the existing 800,000-square-foot property, which is anchored by Macy’s and Boscov’s. The new expansion will include a 65,000-square-foot Whole Foods Market that will be connected to a 40,000-square-foot, open-air lifestyle wing. The expansion also adds several new outparcels and themed restaurants, including PF Chang’s Asian Bistro, Redstone American Grill, California Pizza Kitchen, Benihana as well as a Citibank branch. The expansion and renovations are slated to be complete by the end of the year. With the addition of tenants such as grocery stores and a range of restaurants to regional malls, shoppers can get their groceries, a party dress and dinner all in one trip.

Nathanson

While some retailers remain strong, leasing has slowed among junior box spaces that range from 10,000 square feet to 40,000 square feet. “It is a result of over expansion, overlapping markets and the fact that the current economy can’t support the amount of competition that has come on the market in the last 5 to 7 years,” explains Nathanson.

The retail development market in Philadelphia is also changing in response to the current climate. The slowdown in the expansion of retailers, in addition to higher construction costs have put a damper on future projects.

“The residential boom and retailer expansion were key drivers for retail development in the past years, but as the economy continues to shift and retailers limit expansion plans, retail development will slow up,” explains McClernon. “Retail development projects that were in the pipeline heading into 2008 are currently being completed, but projects in planning stages could be subject to further review. Those that go forward will be very strong locations.”

However, development is still occurring and several major projects are underway, including the aforementioned Providence Town Center and Uptown Worthington, as well as the newly announced Sanatoga Springs in central Montgomery County along the growing Route 422 corridor, and ParkWest Town Center in West Philadelphia.

The 442 corridor has exhibited substantial growth over the last few years, and several developers have jumped on the area for the development of retail projects. “When the 422 corridor opened up, it really expanded that entire Philadelphia Metro area, pushing growth in that direction, which pushed housing growth,” says Pasquarella. “People moved out there, jobs moved out there and then the shopping centers followed.”

The current lending environment is also hampering new development as well as the leasing market in Philadelphia. “Commercial banks have tightened their lending practices, making underwriting standards much stricter, and they are also looking for more cash to go into the deal,” says Soloff. “Construction loans are also becoming tougher to obtain because lenders are requiring a much higher loan-to-value ratio.”

Nathanson notes that with the end of the conduits, developers and investors alike are leaning more towards the regional and national banks and the life companies for financing.

“Developers are going into the projects 3 to 4 years prior with construction loans, but because of the current economy, rents have not appreciated as much as was expected in the last 24 months, and that, coupled with the slow down in leasing, has made it difficult for developers to go from a construction loan to a permanent loan because they are not getting the same proceeds that they once thought they were going to,” he says.

Since the different facets of the retail market are so intertwined, it is no surprise that retail investment sales have slowed as well, especially when compared to the velocity that was seen the past few years. Quality, well located shopping centers are still drawing interest from investors, as well as single tenant assets, however McClernon notes that this product type has dropped in volume due to the reduction in 1031 exchange capital.

“Cap rates on single tenant assets have risen between 40 and 60 basis points. On the shopping center front there is still a relative desire for Class A, grocery anchored shopping centers, but even those property types are still 30 to 40 basis points off of where they were trading a year ago,” remarks Nathanson. “If they are trading, it is in the low- to mid-7 cap range, and B and C centers located in those tertiary markets are trading in the low- to mid-8 cap rate, almost 100 to 150 basis points off.”

McClernon notes, “Capital markets will drive the expectations between buyers and sellers and there seems to be a strong market for sellers who have made the adjustments to meet the changing capital markets. Activity should pick-up as we move into the fourth quarter of 2008 and the first half of 2009.”

Obviously, it is hard to predict the future of the Philadelphia and New Jersey retail climates with so many factors affecting it involved, but all of our experts agreed that these two markets are solid, and although things have slowed, the market will come back, and it is most certainly not all doom and gloom in these two regions.

Uptown Worthington Underway

O’Neill Properties Group is currently constructing Uptown Worthington in Malvern, Pa.

O’Neill Properties Group is currently constructing Uptown Worthington, a massive mixed-use development with a major retail component, in Malvern, Pennsylvania. Upon completion in fall 2009, Uptown Worthington will be the largest mixed-use community of its kind in Chester County, featuring approximately 1.6 million square feet of mixed-use space.

Situated on 100 acres on the site of the former Worthington Steel Factory, the project exemplifies today’s New Urbanist ideas. “O’Neill Properties was able to significantly clean up an environmentally contaminated site and greatly improve it, as opposed to destroying a site,” explains Brian O’Neill, founder and chairman of O’Neill Properties Group.

The development group is also using a number of green principles in the construction of the project, and it will also include a number of open green spaces to further enhance its sustatinability.

The project will feature in excess of 500,000 square feet of office space, 750,000 square feet of retail space, 750 residential units and a 240-room luxury suites hotel. Signed tenants for the retail component include Wegmans, L.L. Bean, Muvico Theaters, American Eagle, Aeropostale, a Starbuck’s Coffee, 13 restaurants with outdoor dining, and about 40 other fashion retailers and national brands.

The site is ensured to be an automatic success, nestled within the wealthiest locations in the United States. “It is one of only four locations in the United States in which the market area is 100 percent over $100,000 per household income, and more importantly, over $40,000 per capita income,” noted O’Neill. “The firm completed a study, and it is estimated that the retailers will average $600 per square foot in sales.” In comparison, this number is about 40 percent better than what is traditionally expected in most retail centers.

And yet, the area is surprisingly highly under retailed, mostly due in part to its high barriers to entry; however, since O’Neill Properties was essentially completing a major upgrade to the site, the project was a no brainer for the area. Along with the development of some very welcomed retail, Uptown Worthington will serve as a gateway to Malvern that did not exist before.

— Stephanie Mayhew


Village at Pine Shopping Center

In Wexford, Pennsylvania, the Village at Pine Shopping Center is well underway. Totaling approximately 150,000 square feet of space, not including the square footage of outparcels, the center will feature an 82,000-square-foot Giant Eagle Supermarket, a Starbuck’s Coffee, Dollar Bank, Sky Bank and PNC Bank, along with other small shop retailers. Rick Crimone of GVA Oxford, which is handling the leasing for the retail portion of the project, says that the site’s location within Pine Township is ideal due to the high density and high incomes present in this suburb situated just 4 miles south of Cranberry Township.

“The development of the Village at Pine Shopping Center is a reflection of the growth that has occurred over the years in the northern suburbs,” Crimone explains. The center will address the requirements of that population with a major supermarket and the kinds of necessity retail that will accompany it.”

The center is also surrounded by 134 units of residential product. The Giant Eagle Supermarket is slated for completion in the first quarter of 2009, and the outparcels are in various stages of construction, with some set for completion late this year.

— Stephanie Mayhew


The Shoppes at Cross Keys

The Shoppes at Cross Keys

Columbus-Ohio based Stanbery Development continues its development push in New Jersey. Construction is currently underway on the Shoppes at Cross Keys in Gloucester Township, New Jersey. Located at Berlin-Cross Keys Road and The Atlantic City Expressway in Camden County, the site is strategically located along one of the state’s newly developed expressways.

According to Ray Brunt, who is the head of Stanbery’s New Jersey office and handles all aspects of leasing, the firm looks for sites that are 5 or 10 miles from other upscale shopping environments, but also far enough away that cannibalization will not be a problem for retailers. In the case of Cross Keys, Marlton, New Jersey, was the closest location with upscale retailers.

“Stanbery also looks for areas with good growth,” Brunt explains. “As a result of an exit opening up at the Cross Keys location on the Atlantic City Expressway, the opportunity for people to live in this area and still be able to commute to Atlantic City has also opened up. This also opened up the opportunity for long-term growth in the future.”

The new lifestyle center will feature approximately 170,000 square feet of prime retail space. Signed tenants include Justice, Ann Taylor Loft, Coldwater Creek, Rack Room Shoes, T Mobile, Jos. A. Bank, Banana Republic, New York and Co., White House | Black Market, Select Comfort, Chico’s, Lane Bryant, and Bensi Italian Grill. The center is slated to open spring 2009.

— Stephanie Mayhew


Providence Town Center

In the growing 422 corridor, The Brandolini Companies is developing Providence Town Center, a 725,000-square-foot hybrid center. Located in Collegeville, Pennsylvania, at the Route 422 and Route 29 interchange, the new ground-up development will feature pad/restaurant sites, main street retail type shops and junior anchors, as well as ample parking all set on 80 acres.

According to Brandon Famous of Fameco Real Estate, which is working in an advisory capacity with Brandolini, the location of the site makes it ideal for a retail center because of the recent growth in the 422 corridor.

“Stretching 19 miles from King of Prussia to Pottstown, Pennsylvania, the corridor had the highest residential growth in the Philadelphia region during the late 1990s and early 2000,” explains Famous. “So, significant housing growth, coupled with the fact that you have several major pharmaceutical companies, including Glaxo SmithKline, Wyeth and Quest Diagnostics, which contain approximately 13,000 employees, headquartered across the street from the site, makes and incredibly ideal location.”

Another plus for Providence Town Center is its proximity to King of Prussia.

“The center is approximately 9 miles northwest of the King of Prussia corridor, which has the largest daytime population outside of Center City, and features literally 20 million square feet of office space,” notes Famous. “The majority of the people that work in King of Prussia live in the area where Providence Town Center is being constructed.”

Signed tenants include Wegmans, Best Buy, Dick’s Sporting Goods, LA Fitness, Staples and Ulta. The retail component is currently under construction and is scheduled for completion November 2009.

— Stephanie Mayhew


©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.




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