Chuck Albrecht’s Northern Tool + Equipment is based in Minnesota, but the retail executive has been active in South Florida for more than 20 years. He knows when the local market is healthy enough to support expansion.
In February, Albrecht’s 75-store chain opened its third store in the region in Pompano Beach. And he’s inspecting several South Florida locations as expansion candidates.
“We’ve always been confident in South Florida,” he said. “To say we’re bullish would be overstating it a bit. We’re happy with our position in the marketplace and will look for opportunities when they present themselves.”
After two years of tepid retail performance in South Florida, local observers are finding tangible evidence of recovery. They see a rising appetite for shopping centers on the part of both domestic and foreign investors, and an uptick in lenders willing to finance property transactions, expansions and new development.
A return to the robust pre-recession market is not imminent, however. That may not come until further employment gains are made, the capital markets loosen further and the glut of pending foreclosures runs its course.
The increasingly burdensome cost of gas doesn’t help.
Overall, South Florida “has seen an increase in retail excitement in the last six months or so,” according to William Kerdyk, president of Coral Gables-based Kerdyk Real Estate and chairman of the Bank of Coral Gables.
That enthusiasm is about to translate into a wave of retail property sales.
In its annual National Retail Report released last month, real estate firm Marcus & Millichap projects the retail property investment market will surge in Miami-Dade, Broward and Palm Beach counties. The company’s report cites vastly improved operating fundamentals, a rosy long-term forecast for South Florida retail, and more financing options for investors in its 2012 forecast.
In Miami-Dade County, retail vacancies should drop from 6.9 percent to 6.2 percent, which would be the lowest level in four years. Marcus & Millichap expects asking rents to rise 1.5 percent to $23.65 per square foot.
Broward County retail vacancies are forecast to drop from 10.3 percent to 9.7 percent, with asking rents inching up 0.7 of a percent to $18.16 per square foot, according to the company’s report. Palm Beach County vacancies should dip from 10.3 percent to 10.1 percent, and asking rents should gain 0.8 of a percent, to $20.96 per square foot.
As the Marcus & Millichap forecast indicates, “Miami-Dade is overwhelmingly outperforming the other two” South Florida counties, said retail veteran Stephen Bittel, chairman of Terranova, the Miami Beach-based commercial real estate advisory firm.
But Broward and Palm Beach counties are not completely ignored. In South Florida’s most expensive retail transaction in nearly six months, an affiliate of Des Moines, Iowa-based institutional group Principal Real Estate Investors last month paid more than $52 million for the Publix-anchored Shoppes at Woolbright in Boynton Beach.
Investor interest in high-quality Publix-anchored shopping centers is nothing new. A true sign of a retail sector on the rise is when Class B and C properties start trading again.
Investment sales activity is indeed beginning to trickle into the lower tiers of properties, according to Mark Gilbert, executive vice president of Cushman & Wakefield’s Southeast Capital Markets Group in Miami.
Property sales are “stretching across all quality levels, from A’s to B’s and suburban to urban,” Gilbert said. “I’m seeing the expected pricing and actual pricing getting pretty close together. A transaction today has a better probability of happening” than in recent years.
While lower-tier property sales are inching up, they are still much harder to close unless the deal involves a lender initiating the sale of a distressed property, according to retail specialist David Donnellan, first vice president at CBRE.
“Demand is strong for middle-tier properties,” Donnellan said. “The reason there’s not as many trades yet is because of a bid-and-ask [gap] between what sellers are looking for and what buyers are looking to pay. Buyers are willing to be realistic, but not to the point where some sellers are at.”
A surge in noncore retail center trades could come as more financing options emerge.
Lenders bore the brunt of the blame from frustrated brokers and investors for the lack of retail property sales during the recession.
Thus, if the anticipated flurry of South Florida property sales becomes a reality, industry experts say those same financial institutions will deserve the credit.
These days established retail owners and operators with solid track records can obtain “all the debt capital you could ever dream of wanting, at pricing you can’t believe is possible,” Bittel said.
Terranova in February secured a $22.5 million refinancing from PNC Bank for Suniland Shopping Center in Pinecrest. An existing loan secured by the center was not going to mature for another two to three years, but Bittel said he could not pass up the chance to lock in an interest rate under 4 percent for seven years.
Suniland is a stabilized retail center with strong tenants, including CVS and Starbucks. A center with strong anchors is not necessarily a must for property owners seeking similar interest rates, however.
“I’m definitely finding more and more debt available for retail,” said mortgage broker Eric Fixler, managing director at Boca Raton-based Johnson Capital.
“I just closed a transaction involving a mom-and-pop center on Biscayne Boulevard,” Fixler said. “It closed at 5.25 percent for a fixed-rate deal at a 10-year term, with two consecutive five-year terms. If you’ve got guys who are stand-up individuals, local banks are stepping up at good favorable rates.”
Another recent example of South Florida retail property owners jumping on the chance to refinance or secure new financing: Simon Property Group in November 2011 renewed a mortgage secured by Dadeland Mall and obtained a $275 million advance from the Prudential Insurance Co. of America and New York Life Insurance. Simon has since announced major expansion plans at the Kendall shopping hub.
Earlier this year Dolphin Mall owner Taubman Co. expanded by $175 million a credit line secured by the west Miami-Dade County retail center and two out-of-state properties.
In rare instances, most notably with Swire Properties’ planned Brickell CitiCentre development, lenders are re-entering the world of speculative construction lending. Swire last month obtained a $140 million credit facility from HSBC Bank USA to kick-start the $1.05 billion project. The initial phase of the development is expected to include 520,000 square feet of retail space.
However, for buyers of non-trophy retail properties or developers that lack Swire’s track record, many lenders still look at financing “with a jaundiced eye,” real estate executive Kerdyk said. Some institutions are still “handcuffed,” he said, by restrictions from federal regulators.
“It’s not that you can’t find capital, it’s the amount of capital you have to put into” a retail acquisition, he said. The loan-to-value ratios “are much different than they were years ago.”
A revival of the commercial mortgage-backed securities market would go a long way toward filling the retail lending void, particularly with lower-tier shopping centers, Donnellan said.
CMBS lenders were a “very large provider of financing for lesser-quality properties when the market was chugging along and doing well” in the mid-2000s, he said.
But those who do not require outside capital, particularly international investors, are not waiting for a lending revival to make acquisitions.
Foreign investment in real estate has helped South Florida bounce back from the recession faster than many other U.S. regions, particularly in the residential sector. But international investors historically have shunned retail purchases, except for atypical instances when an individual acquires a shopping center or gas station to obtain a visa. Retail properties often require a high level of hands-on management, so condominiums are a better fit for an absentee investor.
An exception would be international investors who are shareholders of real estate investment trusts. Many REITS covet large retail properties, particularly with strong anchors like Publix. For instance, the largest shareholder of North Miami Beach shopping center investor Equity One (NYSE: EQY) is Gazit-Globe, a Tel Aviv, Israel-based real estate firm.
“Some of the best-run retail REITs have substantial foreign ownership,” Gilbert of Cushman & Wakefield said. “There’s also a fair amount of foreign capital invested directly in retail through advisers. That comes more from Europe and the Middle East.”
On the private foreign investment side, the aversion to retail is dissipating.
Individual international buyers “are making direct investments in retail space,” Gilbert said.
“Foreign capital tends to chase marquee assets and high-profile assets,” he said. “Many times they want to own in South Beach on Lincoln Road or downtown Miami or Worth [Avenue in Palm Beach], versus owning a freestanding drug store.”
Miami attorney Wayne Pathman, a partner at Pathman Lewis who represents real estate investors and developers, told the Daily Business Review he was recently approached by a French hedge fund that is looking to spend “hundreds of millions” on commercial properties in South Florida, including retail.
Pathman declined to name the hedge fund.
“A lot of money is coming in here from foreign countries,” Pathman said. “There is a high volume of French business looking to invest. As the markets change, especially in Europe, we are seeing a lot of investment here.”
South Florida’s retail sector is bouncing back from the real estate downturn faster than the office sector, which has been hampered by unemployment and a construction glut in key markets like Miami’s Central Business District. But the industry has significant ground to make up to match the region’s multifamily and industrial sectors.
Continued labor and housing gains would help make retail property owners and retailers feel the recession is behind them.
Albrecht, the Burnsville, Minnesota-based retailer, monitors national and local employment and housing market reports to gauge retail consumption.
“There are definitely pockets of Florida where unemployment is at a place nobody wants it to be,” he noted.
For instance, February unemployment stood at 9.7 percent in Miami-Dade County, well above the national average of 8.3 percent, according to the state’s labor market statistics center.
Even with broader economic concerns, Northern Tool has added six new stores in the last three years and plans to sustain that pace without ruling out South Florida, Albrecht said.
Local recovery could be slowed by Florida’s foreclosure system, Donnellan of CBRE said. Distressed properties will be working their way through the courts for another few years.
“With Florida being a judicial foreclosure state, it takes longer for lenders to push the process across the finish line,” he said.
A wave of new mortgage defaults could further clog the foreclosure system.
“There are still a lot of outstanding loans that might be performing but could have maturity defaults over the next couple of years,” Donnellan said. “We’re still in the middle innings of the cycle.”