Retail Real Estate Market Myths, Truths & Trends

Following are some key points, excerpts and paraphrasing from an Urban Land Institute lunch I attended in Kansas City last week. Dan Lowe, Managing Partner of RED Development LLC. Dan went through a quick summary of some of the regional centers they were still actively developing, and how the projects have stayed alive. Many of the common issues are in the list below.

Truth – Frugal is the new ‘black.’ And that does not necessarily mean low price. Higher levels of service for the same price, or other value added experiences also contribute toward people feeling like they are getting more for their money.

Truth – Traditional debt market is almost non-existent. National banks are pretty much out, regional banks are strapped or being highly regulated.

Myth – Discounted notes are abundant. The idea that the recession and foreclosures will drive down all appraisals is false. Yes, there are some deals out there, mainly in the instance where developers still own the project. But the majority of ‘distressed’ properties are still holding value.

Trend – Urban infill is hot. Greenfield and suburban development is cold.

Trend – Land value can no longer assumed to be a line on the ‘expense’ list. Landowner participation, or outright ownership needs to help build equity in the loan.

Truth – In 2009, there were many tenants asking for rent reductions, and assistance in financing inventory. So far they have not had a single request in 2010.

Myth – Kansas City is a ‘major’ market. Top institutions do not see the KC metro area as a major market. There needs to be work to promote the metro area, and strength in demographics.

Trend – Co-Tenancy leases should no longer be part of a leasing strategy. Each retailer needs to look at their specific market and demographics, and not rely on adjacent tenants to drive traffic.

Trend – Outlet center development will continue to be a strong segment, with more experiential spaces, and more stable (less cyclical) business.

Trend – Transit is becoming more important to commercial development, especially with the urban development trend.

Fact – You can’t do (as a business) what you did 2 1/2 years ago. Your thought process and business strategy needs to evolve, if it has not already.

My take away was that while times are definitely tough in commercial real estate development, the last couple of years have forced the parties to look at different ways of doing business. And for the most part, those that survive will be stronger as a result. How have things affected your business and have you adapted?