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Capitalization rates for single-tenant net-leased retail properties declined in 2Q12, according to The Boulder Group’s 2Q12 Net Lease Market Report. In contrast, cap rates for office and industrial properties rose slightly, according to the report.

Restrained development and an abundance of available capital for these assets have contributed to continued cap rate compression in the retail sector. Tenants seeking reduced rents are backfilling existing space, such as vacated Borders locations, further hindering the sector’s supply, according to the report. Cap rates are likely to continue moving downward as many national retailers curtail expansion plans.

Available financing and stable cash flows are expected to fuel transaction volume in the overall national single-tenant net-leased market. Institutional and private investors are drawn to the sector’s stability, and core assets with investment-grade tenants will continue to be in high demand, according to the report.

Source: The Boulder Group via CCIM

As we’ve touched on before, when a big box space is vacated often landlords or cities are left with empty commercial space too large to easily fill. But when Wal-Mart closed and abandoned a 124,500 square-foot retail store in McAllen, Texas, the city decided to reuse the inherited structure as a new main library.

Meyer, Scherer & Rockcastle, Ltd was chosen to transform the single-story building into a highly functional, flexible library.

To meet this challenge, the designers had the old store interior and new mechanical systems painted white to form a neutral shell and used form, material, color, and light to create more intimate spaces within the large space.

The new space – equivalent to the area of two and a half football fields – makes the new library the largest single-story library in the U.S. The McAllen Public Library won the 2012 Library Interior Design Competition by the International Interior Design Association and boasted a new user registration increase of 23% after being opened for just one month.

An excerpt from “Big-Box Space Remains Hard to Fill” by Kris Hudson, Wall Street Journal contributor.

Close to a year after Borders Group Inc. collapsed, suburban shopping centers still are struggling to fill the vacated big-box space—and to cope with changes in the way Americans shop.

Many shopping centers that lost Borders after the chain announced its liquidation are suffering high vacancies, falling rents and even debt defaults. Values have been falling in particular for the suburban shopping centers that rely heavily on big-box stores and have been bearing the brunt of the impact from online retail competition.

Take the case of the Regency Park Shopping Center, outside of Kansas City, Kan. The former Borders store there stayed shuttered for months, and when its landlord—Dallas-based real-estate investor Henry S. Miller Cos.—finally filled it with a Natural Grocers, the rent was “significantly lower,” said Greg Miller, a senior vice president.

By then Regency Park had defaulted on its $25 million mortgage. The center has a vacancy of 30%, and its value had declined to $9.3 million in December, from $32.8 million in 2006, according to loan data provided by Trepp LLC, a debt-analysis firm.

“It’s been a two-steps-forward, one-step-back deal,” Mr. Miller said.

A new survey of 205 closed Borders stores shows that one-third are still vacant, according to brokerage Colliers International. Those stores that filled the former Borders space are leasing at rates roughly 30% lower on average than what Borders paid, Colliers said.

“Some landlords have been reluctant to, in effect, take the lower rents that retailers are offering [to pay],” said Mark Keschl, Colliers’s national director of retail brokerage. “Now that they’re going on sitting vacant for roughly a year, we think landlords will be a little more practical.”

Some popular malls and downtown shopping areas have been able to replace Borders without cutting rents thanks to their locations and appeal to residents and tourists.

But many big-box centers that depended on stalwarts like Borders, Best Buy Co. and Office Max have suffered higher vacancy, weaker cash flows and other problems as these retailers have closed or shrunken stores.

After the Oaks Square Shopping Center, in Gainesville, Fla., lost its Borders, other tenants demanded rent decreases to make up for the fact that their big-name neighbor had gone dark, according to Trepp. The landlord, Retail Property Group, replaced Borders early this year with shoe seller DSW Inc., DSW -0.94% but the servicer overseeing the center’s $14.6 million mortgage started foreclosure proceedings last February. Retail Property, which has sued the servicer in an effort to pay off its loan at a reduced amount, declined to comment.

Among those still looking to fill a Borders vacancy is the Watters Creek shopping center in the Dallas suburb of Allen, Texas. “We have a [tenant] looking at taking the entire thing, but we haven’t made a deal yet,” said Terry Montesi, chief executive of Watters Creek’s owner, Trademark Property Co.

Some industry watchers believe that big-box centers are facing problems that go beyond a weak economy. Rather, they suggest that these shopping centers are going to suffer long-term declines because Internet shopping offers more choice and greater ease.

“When [the big-box format] originated, it was about wide selection in a certain category,” said Suzanne Mulvee, retail strategist at CoStar Group, a real-estate-research company. “They had the biggest selection, and that’s why you’d go there. Now the biggest selection is online. So I am concerned about this sector long-term.”

Many shopping centers that lost Borders after the chain announced its liquidation are suffering high vacancies, falling rents and even debt defaults. Above, a vacant Borders store in Allen, Texas.

Overall, national vacancy statistics on big-box centers don’t appear too grim, and new construction is scant. With some retailers expanding, like DSW and Ross Stores Inc., ROST -1.14% the vacancy rate has declined to 6.6% after hitting a multiyear high of 7.9% in 2009, according to CoStar. Even so, rents are near the lowest level they have hit since 2006, and the vacancy rate is rising again and will likely hit 6.8% by the end of the year because of more closings, CoStar reports.

Some large landlords are better positioned to keep their big-box centers filled because they have more clout with retailers and better properties. DDR Corp., DDR -0.71%which counts many big-box centers among its 469 properties, posted average occupancy of 93.7% in the first quarter, up from 92.6% a year earlier.

“We’ve replaced Linens and Circuit with Bed Bath & Beyond, BBBY -2.48% Marshalls, Ross, Wal-Mart, WMT +0.88% ” said Paul Freddo, DDR’s senior executive vice president of leasing and development, referring to the closed Linens ‘n Things Inc. and Circuit City Stores Inc. “We sit here three years later a much better company because of it.”

But California developer Peter Pau also is giving up on the big-box concept in the Bay Area suburb of Newark, where this year he bulldozed most of his Mowry Crossings shopping center. The 200,000-square-foot center had only one viable tenant—a BJ’s Restaurant—after losing its Mervyns, Circuit City, Petsmart and Babies “R” Us. Mr. Pau still owns the project because he had paid its mortgage, but he now intends to rebuild it as a retail format other than big-box.

“It is no longer a power-center,” Mr. Pau said. “We aren’t banking on big-box tenants.”

Write to Kris Hudson at kris.hudson@wsj.com

The May 2012 NAR Commercial Real Estate Forecast published today brings a bumper crop of good news about the economy and fundamentals in commercial real estate in all its sectors. Significant job growth, full recovery and growth in the apartment sector lead the report.

NAR Chief Economist Lawrence Yun points to new jobs as driving the recovery: “Ongoing job creation, which is at a higher level this year, is fueling an underlying demand for commercial real estate space, assisted by a steady increase in consumer spending,” he said. “The pattern shows gradually declining commercial vacancy rates, with consequential but generally modest rent growth.”

Jobs Coming Back In The Millions

Yun expects the economy to add 2 to 2.5 million jobs both this year and in 2013, on the heels of 1.7 million new jobs in 2011, assuming a new federal budget is passed before the end of the year. “Although we need even stronger job growth, by far the greatest impact of job creation is in multifamily housing, where newly formed households striking out on their own have increased demand for apartment rentals – this is the sector with the lowest vacancy rates and strongest rent growth, which is attracting many investors.”

In all areas of commercial real estate, indicators are in the green, according to the forecast:

Office Space Vacancy Projected To Fall

Vacancy rates in the office sector are projected to fall from 16.3 percent in the second quarter of this year to 16.0 percent in the second quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.3 percent; New York City, at 10.0 percent; and New Orleans, 12.6 percent.

Office rents should increase 2.0 percent this year and 2.5 percent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 24.7 million square feet in 2012 and 48.0 million next year.

Retail Markets: Rents and Absorption Up

Retail vacancy rates are forecast to decline from 11.3 percent in the second quarter to 10.7 percent in the second quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.7 percent; Fairfield County, Conn., at 4.0 percent; and Long Island, N.Y., at 5.0 percent.

Average retail rent should rise 0.8 percent this year and 1.3 percent in 2013. Net absorption of retail space is projected at 8.0 million square feet this year and 21.9 million in 2013.

Industrial Markets Manufacturing Demand

Industrial vacancy rates are likely to decline from 11.0 percent in the current quarter to 10.7 percent in the second quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.7 percent; Los Angeles, 5.0 percent; and Miami at 7.2 percent.

Annual industrial rent is expected to rise 1.6 percent in 2012 and 2.4 percent next year. Net absorption of industrial space nationally is seen at 44.1 million square feet this year and 62.4 million in 2013

A Boom In Multifamily

The numbers here seem to be the other shoe dropping concerning the pent-up demand for apartment housing we wrote about here at The Source in January:

The apartment rental market – multifamily housing – is likely to see vacancy rates drop from 4.5 percent in the second quarter to 4.3 percent in the second quarter of 2013; apartment vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New York City, 2.1 percent; Portland, Ore., at 2.3 percent; and Minneapolis at 2.4 percent.

After rising 2.2 percent last year, average apartment rent is expected to increase 4.0 percent in 2012 and another 4.1 percent next year. “Such a rent increase will raise the core consumer inflation rate. The Federal Reserve, in turn, may be forced to raise interest rates, possibly as early as late 2013.”

Multifamily net absorption is forecast at 215,900 units this year and 230,300 in 2013.

Source

Colliers’s recent Retail Whitepaper examines what is driving retail recovery and what will make retailers successful in the days ahead. A summary of the paper follows:

Retail’s dependence on a healthy economy and a fickle consumer makes it vulnerable, but as an investment category retail real estate presents attractive opportunities. For property owners, municipalities, and investors committed to the sector, opportunistic investments can materialize by thinking differently from the herd. This type of forward-thinking analysis involves digging beneath the top-line numbers to understand the factors and conditions necessary for asset performance and values to recover further, and how those elements will favor certain retailers and markets. This white paper aims to identify and analyze successful investment and branding strategies, and the retailers ahead of their peers in executing them.

• Retailers’ corporate success now hinges far less on absolute price than it does on corporate strategies for reinvesting in technology, elevating the in-store experience, and redefining the service aspects of the retailer’s offering.
• Technology investment takes the form of channel diversification: improving and integrating brick-and-mortar, online, mobile, and catalog operations.
• Real estate investments include opening new stores, experimenting with smaller prototypes and upgrading existing locations.
• While “Location” has always been the most important to real estate success, quality tenants are proving equally important at separating a retail project from it’s competitors.
• Retailers “ahead of the curve” in reinventing their physical spaces elevate the shopping experience to focus on every aspect of their business that matters to their customer.
• Retail is becoming more about service and less about “stuff.”
• Successful landlords will be those that remain focused on maintaining a unique tenant mix and be willing, if necessary, to accept lower rents short-term to achieve the long-term payoff of owning a commercially viable property with stable (or rising!) occupancy rates and cash flows.
• Another option is to develop tenants internally: incubating new retail concepts that will eventually take space.
• And, landlords and owners (and their lenders) have to be willing to demolish vacant or under-utilized spaces, foregoing short-term cash flow, to create new retail zones.
• Metro markets poised to outperform in the next decade exhibit one or more of the following attributes:

1. An improving housing market: For May, the Five states with the highest number of improved markets are Texas (11), Florida (10), Michigan(8), and Pennsylvania/North Carolina/Iowa (6).
2. Potential for favorable demographic shifts: The big shift will likelybe demographic, as the 78 million Millennials move into their prime household formation years and and a way to move out of their parents’ basements.
3. Ability to cultivate job growth and a skilled labor force in energy-and knowledge-based industries: Job growth is occurring in areas dominated by industry sectors that either were more resistant to the recession or began to improve earlier in the recovery like powerhouse Texas cities of Houston and Dallas.
4. And proximity to intermodal infrastructure: Big changes are coming for metro areas proximate to intermodal infrastructure, such as deep-water ports and rail lines, as macroeconomic dynamics shift import/export demandand the Panama Canal expansion nears its scheduled 2014 completion. Current growthtrends favor East Coast and Gulf ports.

Full report here.

via CCIM.com Newscenter

Single-tenant net leased retail property capitalization rates experienced a 3 basis-point increase from 4Q11 to 1Q12, according to the Boulder Group’s 1Q12 Net Lease Market Report. Over the same time period, office and industrial net leased property cap rates compressed 15 and 6 basis points, respectively.

The retail cap rate increase is the result of lower quality assets entering the market. The report attributes the influx of lower quality assets — those with non-credit tenants and short-term leases as well as those in secondary markets — to opportunistic investors who are taking advantage of the increased demand and low cap rates in the net lease sector. Although transaction volume for single-tenant net lease properties remains high, investors expect it to cool off as interest rates rise.

Within the retail sector, not all cap rates rose in 1Q12. Cap rates for banks, CVS/Walgreens, and GSA-occupied properties compressed 15, 30, and 23 points respectively. According to the report, these properties “will remain attractive to investors because of the wide availability of credit tenant lease financing for these assets.”

The digital revolution: Store-based retailing will survive if retailers and landlords “embrace multichannel” strategies, says panel at the ULI Europe Annual Conference in Paris.

“The future of retailing is M-commerce [mobile commerce], S-commerce [social commerce], and QR codes [quick response codes],” Jonathan De Mello, head of retail consultancy at CB Richard Ellis, told the audience at ULI Europe’s session on the impact of the digital revolution on real estate.

These concepts—the new language of shopping and consumerism—describe the powerful capabilities that technology offers to retail brands. The ability to buy and sell goods via mobile phones and tablets, and their existence, arguably represent one large step in the evolution of the threat to store-based retailing that has existed since the launch of the World Wide Web in the early 1990s.

But the message from the panel was not quite so downbeat: these new forms of commerce are changing the way consumers use stores, not negating the need for stores altogether. -

Excerpted with permission of Urban Land. All rights reserved. Visit http://license.icopyright.net/3.9271-9626 for details.

Article reprinted from REIT.com

For many would-be entrepreneurs, just knowing where to start can pose an enormous challenge to striking out on their own.

Retail REITs are now rolling out programs intended to help these potential tenants start off on the right foot. Since the beginning of 2012, DDR Corp. (NYSE: DDR) and Kimco Realty Corp. (NYSE: KIM) have implemented two such initiatives.

In the process, the retail REITs are taking a creative approach to luring local business owners and franchises to fill smaller, vacant spaces in their shopping centers. While DDR’s new program helps fledgling small business owners incubate new concepts, Kimco’s program focuses on streamlining the process for business owners looking for franchise opportunities.

Set Up Shop in this Space

DDR officially launched its hands-on Set Up Shop program on Feb. 2. The effort is geared towards to small-shop leasing.

The first few months of a new business venture are critical to long-term success, according to Paul Freddo, DDR’s senior executive vice president of leasing and development. Set Up Shop gives participants access to a team of experts that will work closely with them to ensure their ventures get off to a good start.

Freddo says the program creates a win-win situation for both the company and the business owner. DDR can attract tenants to some of its smaller spaces that are usually more challenging to lease. In turn, the company is offering free rent to participants during the first six months that they are in the Set Up Shop program.

“It’s really about the flexibility, the shorter-term deal and free rent,” Freddo said. “The win for us is that it reduces expenses at the asset level.”

DDR has partnered with SCORE, a national nonprofit association for entrepreneurs, to help get the program off the ground. The association will serve as a resource for Set Up Shop tenants, and its volunteers will offer free business counseling.

The program will initially launch in specific locations within 24 Atlanta-area shopping centers. Freddo says there’s no limit on the type of small business that can be considered for the program, including general retail or service-oriented businesses such as investment counseling or tax services.

FastTracking Franchises

Kimco, on the other hand went the technological route. The New York-based REIT introduced its new FastTrack franchise program in January. FastTrack offers a way for entrepreneurs, franchisees and franchisors to find new opportunities within Kimco properties.

The company has tools on its website that allow potential business owners select a specific franchise and find pre-approved sites within Kimco’s portfolio to open their business. They can also search by location to see which franchises have pre-approved spaces within the center.

The program launched in January. Brett Cooper, Kimco’s Northeast region leasing associate and developer of the FastTrack program, says the company is also putting window signage in vacant spaces within their centers to let people know that it’s pre-approved for specific franchises. Ultimately, the goal is to attract smaller, local businesses.

“The smaller spaces are the toughest ones to lease,” he says. “It’s where the mom and pop shops are that have been vacant for us. This is a way for us to ramp up leasing in the sub-5,000-square-foot spaces.”

Retailers such as Pearle Vision, Cheeburger Cheeburger, the UPS Store and other chain stores are among the 18 national retailers listed so far. Cooper is working on adding another group of 10 chain retailers to that list by the end of the month.

FastTrack is currently available in 46 of Kimco’s shopping centers in the Mid-Atlantic region. Cooper says the goal is to make it available throughout the company’s portfolio within the next six to 12 months.

From the Houston Business Journal

The cheapest rent does not guarantee the best deal. Make sure your landlord is on firm financial footing. Find a qualified tenant representative to advocate on your behalf.

Those are some of the guiding principles businesses should follow before signing a lease, according to commercial real estate experts.

Committing to leasing space — whether in an office building, shopping mall or warehouse — is a major decision for any business, but one that owners and managers often make without being armed with all the facts.

The reasons vary — they are so busy running their companies that they often do not have the time to research the market and seek proposals, they have never negotiated a lease, or have only limited experience doing so.

Or, they take the word of a real estate broker who represents the landlord, not paying attention to the fact that their interests and those of the landlord are not always the same.

“They get lulled into a false sense of security,” said Eric L. Nesbitt, a real estate attorney in Denver, and author of “Negotiating Commercial Property Leases.”

“They drive around, see names and numbers on signs on buildings, call and deal direct with the landlord rep,” he said. “They have a good rapport and think they’re getting a good deal. But, at the end of the day, that agent is going to get the best deal they can for the landlord.”

The tenant may think they got a break because the landlord’s rep took 50 cents or $1 off the lease rate as a concession, Nesbitt said. But, other tenants got $2 off.

Given the relatively weak demand and excess supply of commercial space, tenants should use that imbalance to their negotiating advantage. It’s still a tenant market in retail, depending on the area one is looking to lease in, said Walker Barnett, principal with Colliers International.

However, that is not true with industrial. With a 5 percent vacany level, the industrial market is swinging back toward the landlord, he said.

To fill empty space, many landlords are offering incentives that go beyond cutting the lease rate. Free rent, whether for one month or more, has become increasingly common.

Another example is a more generous allowance for tenant improvements. Landlords pay for improvements to get space ready for tenants up to a certain amount, say $10 per square foot. If the cost exceeds the allowance, the burden falls on the tenant to pay the difference.

By offering a bigger allowance, the landlord is shouldering more of the up-front cost.

Long before negotiating a new or renewal lease, tenants should know the financial health of the property owner.

That is one of the most overlooked aspects of a transaction and one that could come back to haunt the tenant if the landlord is foreclosed upon or does not make good on promises to do renovations or other improvements.

“You have to ask a lot of questions,” said David Zimmer, national president of the Society of Industrial and Office Realtors. “A lot is relative to the size and sophistication of the tenant and the deal. Some information will be readily available.”

Zimmer suggests asking the landlord’s lender for a reference. He also said tenants should insist on a nondisturbance agreement in the lease. Under this provision, the lender honors the landlord’s lease obligations if the landlord defaults on his loan.

A nondisturbance agreement trumps a common provision in leases indicating the lease is subordinate to the mortgage or deed of trust, Zimmer said.

Nesbitt and Zimmer both recommend businesses rely on a qualified tenant representative to find the space that fits their needs and negotiate the best lease.

There is no extra cost since a tenant’s representative splits the commission with the landlord’s broker, an arrangement similar to what happens in residential real estate.

“We like to tell our clients that in most cases, not only are we going to work with you, you are going to save more money than if you try to negotiate on your own,” Nesbitt said.

That is not to say business owners and managers cannot find space on their own, perform due diligence on the landlord, and successfully negotiate a lease.

“Is it possible? Of course,” said Frank Simpson, 2011 president of Certified Commercial Investment Member Institute.

“It’s possible for a lay person to operate on himself but you really need a surgeon to do it. Why would you not want to use a qualified broker? You’re busy. You’re selling widgets. You don’t know the pitfalls, you don’t know the opportunities that the market is allowing in this climate.”

Last Friday, the CCIM Gulf Coast Chapter held the 18th Annual CRE Forecast Competition. Here Barton Kelly has summarized the days lectures for you.

Dr. Mark Dotzour, Chief Economist at the Real Estate Center at Texas A&M University, opened the competition with a report on the state of the national economy giving a positive outlook for the commercial real estate industry. Below are some of his key points.

• Every metro area in Texas is experiencing positive job growth this month and the private sector is ready to get back to work. Government layoffs are inevitable in the coming years, but the private sector’s willingness to hire should offset this.

• Banks need to clear their shadow inventory to bring normal values back to CRE. Thorough auditing and foreclosures of bank’s underperforming assets will help the nation in the long run. “Extend and pretend” practices need to stop. While it is unfortunate that many banks will go out of business, Dotzour sees new banks quickly taking their place.

• Look for Class A properties in large gateway cities to perform well; however, all other assets seem to be frozen. This is causing a “double bubble” effect in certain cities and inflated prices in Washington, New York, and San Francisco.

• In closing Dotzour stressed how important it is that the government show confidence this year and that banks stop solely buying treasuries.

Other area real estate experts were asked their opinions on the industrial, land, retail, office, and apartment sectors. Below we’ve broken down their predictions:

Industrial:

• Times are good for tenants with economical rental rates available; but with low vacancies and very little new construction, potential tenants are having a hard time finding the right property, especially on the north and west sides of town where very few crane-served buildings are on the market.

• Industrial cap rates are coming down: expect to see quality assets in the 7.5-8.5 cap range.

Land:

• Insiders predict midtown Houston land prices to remain high at $45-55/SF. Multi-family developers are purchasing land; currently there are 10 very large land deals in the Houston area set for apartment development, 6 of those inside the 610 loop.

• As housing is concerned, there’s only a 4-5 month land supply of quality lots in Houston.

• Interesting facts: Walmart paid $50/SF for the land between Washington Avenue and I-10, part of the new Washington Heights development by Ainbinder. Kroger recently paid $49/SF for the land to build their new store on Studemont.

Office:

• Insiders predict Class A, downtown office space will command rental rates between $34- $37/SF and sales will average $200-230/SF.

• Job growth was repeatedly stressed as the saving grace for the industry, and experts expect corporate management to finally make hiring decisions this year.

• Large nationwide firms perceive Houston to have office rents at below market rates, a favorable outlook for the city.

• To the investors out there: Don’t be looking for steals, because you won’t find any. Expect to pay market prices.

Retail:

• Service-oriented retail will weather this recession stronger than solely merchandize-driven stores because internet sales are hurting brick-and-mortar companies harder than you’d expect. Given this fact, companies looking to open additional stores need to tap into the opportunites that internet sales provide.

• Zip codes and shipping addresses of current customers are an invaluable asset for expanding chains.

• Similar to the industrial markets, rental rates will increase in 2011 with quality space hard to find.

• “Lifestyle” retail centers with the “right” tenant mix and well-conceived parking garages will see a comeback after the recessionary years; however, population densities are key to their success.

• Investors best bets: size matters, small grocery-anchored centers with stable tenants.

Apartments:

• Big life insurance companies will be prolific lenders in the 2011 multi-family markets but expect to pony up at least 60% equity for such deals.

• We should expect big buys from large institutional investors in core, inner-city markets and for smaller, private companies to acquire apartments in the suburbs.

• Panelists forecast a $1.25/SF rental rate in Class A properties with average market occupancy rates to hover near 88%.