Retail down; industrial sector holding steady

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Like their counterparts in office brokerage who addressed vacancy and rent rate trends last week, local retail, investment and industrial deal makers also are facing unprecedented economic challenges.

Here’s a brief look at those market segments, offered by those on the front lines of commercial sales and leasing.

Retail: Market contraction

Through the first quarter of 2009 nationally, retailers have been at the mercy of a consumer save-rather-than-spend philosophy. As a result, even revenue at moderately priced stores like J.C. Penney and Kohl’s have dropped by 4 percent to 6 percent.

Wal-Mart might be benefiting from recession bargain fever, but upscale tenants like Nordstrom’s and Tiffany’s have watched revenue drop by more than 50 percent in some markets.

Macy’s in Colorado Springs, like a number of national department stores, closed its store at The Citadel mall during the first quarter — and some retailers are beginning to look at shorter hours or smaller spaces.

PlainVanillaShell.com, a retail industry Web site, interviewed Hessam Nadjim, managing director at Marcus & Millichap Real Estate Investment Services in Walnut Creek, Calif. He said the retail real estate industry’s woes are different than during the recession of nearly 20 years ago.

“This time the industry is ‘the victim of the economic and financial crisis,’” he said, forecasting that retail vacancies nationwide “will climb to 11 percent by year-end, matching the peak of the early 1990s.”

Here in the Pikes Peak region, those retailers offering bargains — dollar stores, pawn shops and used car dealers — are doing relatively well, said Grubb & Ellis retail brokers Candace Seaton and Jim Chacon.

However, they said that vacancy rates will be on the rise for at least the next 12 months.

Seaton and Chacon cited a Grubb & Ellis report that showed after a five-year run, landlords are starting to find themselves in a more competitive environment.

“Tenants, fearful of paying for unneeded space and crunched by an increase of nearly one-third in rates over the past four years, are opting for short-term leases with little or no expansion space,” the report said.

While they bottom-lined the Colorado Springs market during 2009 as heading “back to basics,” all news was not grim.

“There’s still growth out there,” Seaton said, citing a steady flow of “mom and pop” tenants as well as continued expansion by fast food, low-end grocery stores, health clubs/gyms, smart phone and movie/entertainment companies.

That could be due, in part, to the area’s better-than-the-national average median household income of $52,000 (nationwide, the figure is slightly more than $49,000).

During 2009, for example, Costco, Lowe’s and Kohl’s will expand into the local market, taking the place of such big box tenants as Blockbuster, Circuit City and CompUSA.

Investors, on the other hand, “would be crazy” to move forward on new shopping centers in the current environment, Seaton said, “unless they had tenants in hand going in.”

Seaton and Chacon, along with retail/investment broker Michael Palmer, have watched most landlords become proactive, renegotiating leases for the short term — two or three years — in order not to lose tenants.

Turner Commercial Research showed average retail rents at $14.30 per square foot through 2008. Based on new realities, however — declining sales revenue and vacancies increasing to 8.5 percent from 7.8 percent a year earlier — the average could downshift, especially for older centers.

Most purchases in this sector continue to be dominated by owner/users that are able to qualify for U.S. Small Business Administration lending programs, Palmer said.

Industrial ‘counter-cyclical’

In the face of challenging economic times, one commercial sector seems to be holding its own.

Industrial rents averaged $7.01 through 2008, and appear likely to remain near that level through the coming year, according to Turner Commercial Research and the Grubb & Ellis forecast.

Vacancies through first quarter topped 9 percent, although smaller buildings — from 1,000 to 10,000 square feet — saw only 7 percent to 8 percent vacancies and remain at a premium, said Rich Kelly and Andrew Madden, Grubb & Ellis Quantum Commercial Group industrial brokers.

Kelly has seen his share of activity so far this year. Last month, his two-year listing of the 80,000-square-foot former Hotsy building on Garden of the Gods Road was leased to Tech for Less.

The locally headquartered company is an example, he said, of Colorado Springs successful “organic” industrial growth — the kind of sustainable local company that continues to expand its space.

He also handled the 43,000-square-foot Plasmon lease of Corporate Office Properties Trust’s Hybrid II office/industrial building last year, although the company has since closed and abandoned its space.

Pointing to the 80,000-square-foot lease of the Vitesse Semiconductor building to Verizon, Kelly sees a stable market ahead, especially for sellers hoping to attract owner-users.

“They’re still able to get SBA loans and qualify to purchase buildings,” he said. “It’s an active market segment.”

While last year’s negative absorption of 122,647 square feet might sound like a deterrent to forward progress during 2009, Turner said industrial building and condominium sales averaged $63 per square foot — the second highest value recorded during the past 25 years.

Like other sectors, industrial leasing and sales faces financial challenges.

Finding users for larger 50,000- to- 100,000-square-foot properties — like Diamond Wire which leased 110,000 square feet on North Stone Street during 2008 — requires identifying tenants with top credit ratings and landlords with the ability to finance often-expensive tenant improvements.

“Industrial tends to be counter-cyclical,” Kelly said. “We’re actually doing pretty well in view of the market as a whole.”

Turnaround next year

So how do the brokers in these and other sectors see 2009-10 investment deal-making?

The whole world is going through re-pricing right now, which can make it hard to establish building values for investors, said Grubb & Ellis Quantum Commercial Group managing broker Dale Stamp.

“Commercial follows residential, and I think we’re bobbling on the bottom in home sales,” he said.

All brokers agreed that the county assessor likely will see an increase in the number of building owners who appeal their 2008 assessed property values, as for-sale prices have decreased by as much as 15 percent in some cases.

“There are opportunists who would invest, but they’re looking for quality projects at a huge discount,” Stamp said. “There’s money out there, but you have to have a reason to buy right now — and so far the best properties aren’t on the market.”