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BOSTON-The bloom is clearly off the retail rose, but speakers at an industry event here did their best to plant a seed of optimism for the New England landscape. Moderator Geoff Millerd of Cushman & Wakefield joined keynote speaker Suzanne Mulvee of PPR and broker Ben Starr in forecasting a mixed 2008 where top-rated tenants will benefit from the demise of weaker concepts and retailers dunned by the lingering subprime crisis. And while the debt debacle continues to foment uncertainty, Millerd said the investment sales team at his firm is following up a record 2007 of $780 million in volume with fresh opportunities and eager buyers, albeit no longer the highly leveraged crowd that created a frenzy last year.

“Our phones are ringing again,” said Millerd, recounting how the market cratered along with the remaining real estate sales sector once the debt crisis took hold in mid-summer. The biggest challenge, the C&W senior director relayed to the audience at Boston’s Westin Waterfront Hotel, is in getting obdurate owners to accept adjusted pricing required from more expensive financing and disconcerting economic storm clouds, such as a record decline in consumer confidence during the past five months.

“The market is starved for quality assets,” said Millerd, whose underlying theme to prospective sellers attending the C&W-sponsored program was “Don’t’ Miss the Bus in 2008.” While acceding that the peak has passed. Millerd stressed that buyers are still ready to pay close to historic figures for malls and shopping centers in New England. One reason, Mulvee explained, is that the region has not been overrun by new construction as seen in other parts of the country such as Florida, Las Vegas and Southern California, ironically an area battered by employment losses from the mortgage sector morass. “Huge amounts of supply are being added,” Mulvee relayed in her overview of the US economy and its impact on the retail arena.

The fresh inventory will bump national vacancy rates up by 1.5% in 2008 after a similar gain in 2007, Mulvee reported, and the senior economist warned that retailers related to the housing market are on shaky ground, with sales of building supplies down sharply. “Retail numbers are not that great,” Mulvee said, making rent accretion difficult, particularly since increased occupancy costs of 7% are already squeezing profit margins. The US economy bears watching as well, said Mulvee, calling the January job results “ugly,” and noting that the unemployment rate has crept up slightly during the past year to 4.9%. As a result, she says, investors will be less inclined to stray into tertiary markets, or will mandate strong returns if they follow such a path. “You are actually going to get a risk premium again,” she said.

Millerd predicted a similar reaction, indicating that the institutional buyers who led the market in 2007 proved last year a desire to stick to primary markets. Of the $2 billion in retail sales for centers of 50,000 sf or more in New England last year, 60.9% was spent inside Interstate 495, says Millerd, versus 45.7% of the total traded in 2006. Stricter underwriting and a higher level of institutional capital should continue to stoke that trend, said Millerd. Only exceptional retail markets such as Nashua, NH, and South Portland, ME, will lure that capital beyond metropolitan Boston, he indicated.

Some buyers will be even more insular, Millerd said, focusing on high-quality urban retail, a rare commodity that is drawing cross-border capital to such preferred sections as Boston’s Newbury St. Several 2007 transactions on that shopping Mecca yielded per sf rents in excess of $1,000, with 201 Newbury St fetching an astounding $1,700 per sf. The overall cap rate for 19 Newbury St. sales was a mere 4.9%. Boston had a record $374 million of urban retail sales in 2007, up from $120 million the previous year, including $205 million on Newbury St. Millerd said he anticipates more of the same for 2008, especially due to the arrival of Spanish and German money to compete with aggressive Irish capital and private buyers such as Kimco Real Estate of New York City.

The leasing climate was handicapped by Starr, a principal at Atlantic Retail Properties who told of a similar flight to quality among tenants as that anticipated from retail investors. A “Darwinian” atmosphere is leading to substantial changes in the shopping world, Starr added, led by dominant chains such as Best Buy and Target. “From a deal-making perspective, they are going to exert their will,” said Starr, whose outlook for the region is “blue skies, but a few clouds.” As with Mulvee and Millerd, Starr portended a flight to quality, with aggressive expansion into rural and suburban enclaves being curtailed. “We are not going to see that again,” Starr said in telling of a small New Hampshire community recently being courted by two home improvement giants.

Starr also agreed that housing-related shopping is going to take a deep hit, and said he anticipates a drop off in construction from such casual dining chains as Applebees, Ruby Tuesdays and TGIFridays, requiring owners of pad sites to pursue alternative uses. One popular source, Citi bank, is not expected to help, said Starr, with that institution’s rapid expansion into some 30 regional sites appearing to have run its course. Overall, however, Starr expressed optimism, especially for the best product. Even as some retailers drop off the map, others are arriving to take their place, he said, listing among the new arrivals Bass Pro Shops, Cabela’s and Chipotle Grill. “Plenty of retail is looking to get into New England,” he said. “If you read the press, you’d think it’s the ice age, but we don’t see that,” Starr said.

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