Jones Lang LaSalle


Retail landlords exult in high rents
Sunday, May 28, 2006
By JOAN VERDON
STAFF WRITER

It's a good time to own retail real estate.
The mall developers who gathered last week for their annual convention and leasing fair said they're living a landlord's dream, with prospective tenants fighting for a chance to pay record-high rents.

"It's going great! I'm getting ridiculous rents," one real estate broker shouted as he greeted a friend in the Las Vegas Convention Center, where developers and brokers set up booths and made deals during the convention.

"I know," his friend shouted back. "My rents are insane."

"Judging by the optimism that I've sensed around the conference the last few days, I'm thinking something's been put in the water, like Ecstasy," said Hessam Nadji, managing director of research services for Marcus & Millichap, a retail real estate investment firm that issued its annual state of the industry report at the convention.

The report lists northern New Jersey as the 16th-hottest market in the country, up two places from last year. One reason rents are so high in the region, and in other markets around the country, is that new construction is very limited, said Michael Kercheval, president and CEO of the International Council of Shopping Centers, which hosts the convention.

But Nadji and other industry experts caution that some storm clouds on the horizon could cool off the market.

One area of concern is the possible stagnation of housing prices. In prior years, rising home prices have meant that Americans "have been using their homes as ATMs," and cashing in on their rising value through home equity loans, said Nadji. "And now it looks like that ATM is running out of cash."

Nadji said the preliminary signs -- statistics, for example, showing that the supply of condos on the market is up 85 percent over last year -- indicate that "the bloom is off the rose when it comes to housing."

But he said the "biggest risk" on the horizon for retail real estate investors would be the Federal Reserve's overreacting to inflation concerns with additional interest rate hikes, Nadji said. A higher cost of borrowing makes it more costly for developers to fund new projects, and could also put a crimp on consumer spending.

Bernard Haddigan, managing director of Marcus & Millichap's National Retail Group, said another possible concern for retail landlords is the growing number of retailers that have gone private. When a publicly traded retailer goes private, information on its sales and finances is less available. "It becomes a little bit harder to assess the strength and viability of a retailer" who is a prospective tenant, he said.

Several New Jersey retailers have gone that route in recent years, including Wayne-based Toys "R" Us, Burlington Coat Factory and Clifton-based Linens 'n Things.

But right now, Haddigan said, "I'm bullish on the market." In addition to rents and retail sales being strong, the major retailers all are looking to add stores, and that helps make retail real estate a seller's market, he said.

"If you look at most of the national retailers, they all have expansion plans," he said.
The return on retail real estate investments last year was 20 percent, and the industry outperformed the S&P 500, and real estate investment in general, Nadji said.

He is predicting that retail rents will increase by an average of 4 percent this year, and that retail sales will grow by 6 percent. While retail sales growth will be less than last year's rate of 9 percent, he said, 6 percent growth "still is extremely healthy."
E-mail: verdon@northjersey.com

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