February 14, 2011—Retailers ponder consumer’s new conservative spending

By Roger Yohem

INSIDE TUCSON BUSINESS

February 14, 2011

The question for the retail commercial real estate sector in the Tucson region is: Will the rate of store openings outpace the rate of store closings?

As retailers adjust to the new reality of cautious consumerism, more stores will close in 2011.

Conversely, other retailers are planning to expand to capture market share in preparation for an economic recovery.

To do so, they are taking a hard-line strategy to lock in low lease rates and favorable terms at good locations.

And, in the already struggling retail market, the strong growth in online shopping is a game-changer.

“This new reality translated to bargain-hunting consumers and lackluster sales in the face of economic uncertainty,” said Debbie Heslop, associate broker of Volk Company.

By the end of 2010, the consensus turned with the belief that the race to recovery had begun. Retail commercial real estate had hit bottom and landlords were cutting back on concessions.

“Going forward, store openings will improve and most likely, outpace any store closings,” said David Houge, retail market specialist with Tucson Realty & Trust.

Although the Tucson region lost a few big-brand players last year, including Arizona Honda and Hollywood Video, there were also new deals for retailers either expanding or new-to-the-market.

Among national retailers who discovered Tucson in 2010 were Quik Trip, REI, Cheesecake Factory, Burlington Coat Factory, California Pizza Kitchen and Five Guys Burgers & Fries.

Retailers that were already here but expanded included Big Lots, BJ’s Restaurant and Brewhouse, Panda Express, Beyond Bread, Party City, Dollar Tree, Goodwill and Ross Dress for Less.

No new shopping centers were completed in 2010.

Most new construction for retail is in the area around Tucson Mall, including The Corners, a center at the southeast corner of North Oracle and Wetmore roads. The center will include Tucson’s first Nordstrom Rack and outlets for Paradise Bakery and Five Guys Burgers & Fries franchise, all of which are opening this year.

A new 180,000 square foot Costco Wholesale is under construction at Kino Boulevard and Interstate 10, in what’s being called Tucson Market at The Bridges, as part of a master-planned development. The Costco is due to open during the second quarter of this year.

Although financing for development and construction is still a challenge, “retailers continue to view Tucson as a stable market,” said Hogue.

Nancy McClure, first vice president with CB Richard Ellis, said, “Overall, real estate brokers agree Tucson’s retail market is faring better than Phoenix, which has a surplus of vacancies. But unfortunately, empty retail space up north gives retailers unrealistic ideas about negotiating cut-rate leasing deals in Tucson.”

The average asking lease rate at the end of 2010 was $17.52 per square foot compared to $18.99 per square foot at the end of 2009. McClure said rates were reduced “in an obvious attempt” to stabilize rent rolls and fill vacancies. That tactic paid off as 2010 ended with 40,297 square feet of positive net absorption.

By comparison, the sector’s absorption was negative 522,000 square feet in 2009, she said. The vacancy rate did improve slightly, dropping to 11.7 percent in 2010 from 11.9 percent in 2009.

Coming out of the recession and facing increased pressure from online marketing, retailers are being forced to deal with a new paradigm in consumerism.

Around the industry, there is talk that national retailers such as Sears, Kmart, Macy’s and Gap will severely cut back on their “brick-and-mortar” locations in the next five or 10 years. That would dump enormous amounts of big box space onto the market and malls would lose profitable anchor tenants.

Greg Furrier, a principal with PICOR Commercial Real Estate Services, describes it as a “natural evolution” of retail. “We saw that happen with Wards, Zody’s and W.T. Grant. For years, we’ve been predicting that Blockbuster will be gone.

And now, book stores are having a tough time,” he said.

“Some, like Radio Shack, will change their models and be totally different than 30 years ago.”

Regardless of how the new consumer-retailer relationship evolves, the retail commercial real estate market will not panic. If retailers abandon locations, even in malls, prime space will always be in great demand.

Furrier is confident that other retailers will race in to grab it.

By the numbers

ITB Retail Sector stats

2010 base: 20.45 million square feet
2009 base: 20.45 million square feet

2010 vacancy rate: 11.7%
2009 vacancy rate: 11.9%

2010 new construction: 0 square feet
2009 new construction: 70,140 square feet

2010 net absorption: 40,297 square feet
2009 net absorption: negative 522,000 square feet

2010 average sales price level: $126.64 per square foot
2009 average sales price level: $61.11 per square foot

2010 average asking lease rate: $17.52 per square foot
2009 average asking lease rate: $18.99 per square foot

Sources: CB Richard Ellis and CoStar Data reflects shopping centers over 20,000 square feet

Contact reporter Roger Yohem at [email protected] or (520) 295-4254.

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