A New Brand of Rebound
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Retail development is rebounding in Southern California, but it’s a far cry from the type of comeback that the industry staged when it emerged from the previous recession of the 1990s. In those days, development recovered more broadly and more rapidly, both geographically and in terms of types of centers. Today, despite what is undeniably an increase in construction since the lowest point of the recession, the comeback has not gained that sort of momentum.
But however odd this rebound may be, it is equally undeniable. The evidence of that, as developers and industry experts will attest, comes in the new wave of significant projects now under way.
For example, in the fall of this year, the 380,000-square-foot Azalea Regional Shopping Center broke ground in South Gate, CA. Expected to be completed by early 2014, the Azalea project is being developed by Los Angeles-based Primestor Development and will include retailers, restaurants and services in a modern setting with water features, a large open-air plaza, Wi-Fi and gathering areas.
In Upland, CA, Colonies Partners LP is under construction on its 434-acre Colonies Crossroads, which consists of more than 1.1 million square feet. The project will be one of the largest retail developments in Southern California, according to Dan Richards, a co-managing partner of firm.
On the other hand, the impact of the recession still lingers in that development has not approached pre-crash levels. An overview assessment by Michelle Schierberl, managing director of Jones Lang LaSalle, is that development is still at moderate levels today. “But that’s a positive sign compared to virtually no development in the previous five years,” she says.
In addition to the direct impact of the recession itself, one factor now affecting development is unusual if not unique to California: the loss of redevelopment agencies, which the state abolished to bolster California’s shaky finances. Henry Finkelstein, a partner in the real estate group at Greenberg Glusker, says that this shift as an aid to land assemblage and in closing the gap on mitigation costs has made a tough situation even worse. “I have been working on one strategically located project with a committed grocery anchor, with the best brokers in the business, and we couldn’t approach a critical mass,” he says.
Where development is under way, it’s occurring in a different pattern today because of shifting demographics and changing retailing trends. Primestor partner Arturo Sneider tells Real Estate Forum that demographics played a huge part in the company’s decision to develop the Azalea center.
“With approximately 55 million Latinos in the US amounting to approximately 15% of the total population, many owners are jumping on the bandwagon of leasing to Hispanic retailers,” he says, adding, “Now is the best time to invest and develop in underserved Hispanic communities.” Azalea is in a community that has been overlooked by other developers, he notes.
Another factor affecting development is the rise of e-commerce. Schierberl points out that a number of retailers—like Best Buy, Barnes & Noble and Staples, to name a few—are shrinking their typical store size as their sales increasingly shift to e-commerce.
Yet another factor is the amount of space available in existing centers, thanks to widespread store closings by chains like Mervyns, Circuit City and Borders. Vic Montalbo, president of Los Angeles-based Epsteen & Associates, says that big-box chains have adjusted their store layouts to target the buildings that have become available as a result of the store closings.
William Bauman, EVP in Studley’s Downtown L.A. office, cites that same availability of existing space as one factor slowing the pace of development. “The bankruptcies of Circuit City, Wickes, Linens ‘N Things, and Mervyns flooded the market with an abundance of larger anchor-space opportunities that were seized by tenants such as Sprouts, Ross, Marshalls, Hobby Lobby, Wal-Mart, and Ashley Furniture,” he points out.
Re-tenanting and repositioning are key retail trends right now, adds Finkelstein, so those trends affect both development and redevelopment. “Some of the best operators among the large merchants are capturing spaces that might not have been available to them in better times,” he says. For example, he points to Costco, a client of his, which has replaced traditional department stores in regional malls.
Nonetheless, new space is under construction in Southern California and more is planned. Bauman notes that several significant projects are planning to break ground in the early part of 2013, including a Wal-Mart-anchored property in Southgate and Whole Foods/Cinemark-anchored center in Playa Vista. His expectation is that the development trend will continue as more tenants expand, second-generation space continues to be absorbed and banks open up their lending practices. This is a change from the slowdown in development since mid-2008 that resulted from the lack of financing, surplus of second-generation space available and a slowdown on the part of many retailers relative to their expansion plans, Bauman explains.
Other new development is on the horizon in Orange County, where Irvine Co. Retail Properties division president Dan Sheridan said in a recent GlobeSt.com exclusive interview that the company sees growth in 2013 from both development and redevelopment. “We’re adding restaurant pads at Fashion Island, and we’re in the early stage of doing the same at Irvine Spectrum Center. But if I had to identify one single opportunity, I would identify the entire area surrounding the center,” Sheridan said.
Besides expanding the property, the company will also be building a new neighborhood center in the area to further support the growing residential and office populations.
Another way that today’s rebound differs from earlier cycles is that little of the new development is speculative. “We are seeing very little to no speculative retail development other than small strip centers and outparcels,” says Keith Kropfl, a senior vice president in Voit Real Estate Services’ Irvine office. Most of the retail development in Southern California these days is user-driven, he says. Developers—and investors, too—seem to be more interested in the repositioning of older centers and vacant properties than in all-new, ground-up construction.
Even where construction is not under way, developers are seeking land-use approvals in anticipation of future projects, according to Finkelstein of Greenberg Glusker. “There is more flexibility from the cities in approving projects than in the boom years,” he explains. “As parcels entitled for higher densities become available because the original projects no longer pencil out, there’s an opportunity to pursue lower densities with limited opposition.” Many prime infill sites were priced out of retail development when condos seemed the highest and best use, and some of these sites are now becoming available for retail again, he adds.
Where the path of retail development is headed, of course, will also depend on the direction of consumer spending and the economic recovery. Some, if not much, of the heady growth in retail development during the last cycle was fueled by a consumer-spending spree that relied upon cash that homebuyers garnered via refinancing. Without that kind of a boom in consumer spending, retail development is likely to continue at a slow, steady—and more sustainable—level in the years to come.