A Reason to be Optimistic?
Monday, January 31st, 2011Retail Real Estate 2011
After two consecutive years of poor performance, the retail commercial real estate market in Southern Maine may be poised for rebound. Two critical factors foreshadow this recovery.
First and foremost are retail sales. As the economy appears to be gaining positive momentum late in the fourth quarter of 2010, retail spending has increased significantly during the holding season. Despite a lag in hiring, consumers appear to be abandoning austerity and are ready to begin resuming the types of consumer spending that fuel the American lifestyle.
They say to get a handle on trends in the economy, visit stores and observe consumer behavior. At a recent visit to Walmart in Falmouth on December 18, I noticed the garden center was closed. The reason? All the Christmas trees and wreaths were sold out two weeks before Christmas. Neighboring Skillins in Falmouth was also very low on Christmas tree inventory. Inventory for popular items at major retailers is also low, resulting in less of the discounting offered during the Christmas season in 2008 and 2009.
Should holiday sales in 2010 end strongly this year, and the economy continues to gain momentum (avoiding a double dip recession), retailers will begin committing to expansion, which will also help with overall employment.
The second critical factor is current retail leasing activity. Strong national retailers (especially discounters) are taking advantage of soft conditions by committing to new stores in good locations. Companies like T.J. Maxx, Marshalls, Staples, Big Lots and Goodwill are active. They are on the front end of this trend and should be followed by a more broad based expansion.
However, don’t expect this recovery to happen dramatically. The retail market is still feeling the effects of a decade long expansion and many markets are simply “over retailed.”
The best retail markets will recover first. This includes markets that appeal to national and local tenants. Exchange Street in Portland’s Old Port is a good example. Exchange Street is Maine’s premier market for local boutique stores and restaurants. After a decade long run up in rents, Exchange Street experienced significant vacancy in 2009. By mid 2010, vacancies had been filled by a new generation of restaurants and boutiques.
The Maine Mall area is attracting new national retailers and restaurants. A new retail strip center is actually under construction at the intersection of Western Avenue and Gorham Road in South Portland. The pace of leasing at this new center should be a real test of the strength of the recovery.
Community shopping centers with strong anchors should benefit as well. Centers anchored by successful national grocery stores or Walmart/Target stores will be likely to attract new tenants early in the cycle. A good example of this is the Maine Coast Mall in Ellsworth. The center has an excellent location at the intersection of Routes One and Three, and is anchored by a strong Hannaford store. Marden’s recently vacated a 65,000 square foot box in the center to relocate at a former Walmart. Several national tenants are currently in negotiations for the box as well as in-line space that is becoming available.
On the downside, retail centers in secondary locations in both suburban and downtown areas may not feel the effects of a recovery for several years. Retail construction, particularly for big boxes, will remain very slow, a predictable outcome of a decade of expansion combined with a recession.
In summary, look for a modest retail leasing recovery in Southern Maine’s strongest markets, with a lagging recovery in secondary markets and new construction over time.
-Charlie Craig