Wednesday, January 28, 2009

The Reno/Sparks Retail Market – Dealing with an Industry in Transition

Posted by: Kelly Bland
Retail Specialist
775 336 4662

Kelly specializes in anchor tenant representation and shopping center anchor leasing, acquisition and site sales for both retail land and shopping center sites. Additionally, Kelly is involved in investment sales of retail properties..

As we enter 2009, the one good thing we can say is, at least 2008 is over! If you are a retail tenant and survived 2008, congratulations. You’ve made it through one of the toughest years in recent history. Not everyone has been so fortunate. It’s been well publicized that a number of national retailers have gone out of business. The road is littered by the likes of Linen’s and Things, Mervyn’s, Shoe Pavilion, Comp USA, and Circuit City. More recently, Gottschalk’s filed for bankruptcy and I’m sure as the year progresses, more may join this unfortunate group.

In the Reno Sparks Market, we have been hit with the closure of all of the tenants mentioned above, not to mention the numerous local shops that have closed. We had a very interesting occurrence last year in that the area’s Gross Absorption, which is a measure of the total number of deals that occurred, was tied for second highest in more than 18 years of our keeping record. In fact, there was 947,000 square feet of new occupied space last year. Now the interesting part: Net Absorption, which is the square footage of all new deals minus the square footage of spaces being vacated, was actually a negative 11,000 square feet. We actually had a net loss in retail square footage occupied during the year. This is the time Net Absorption has been negative since we’ve tracked the market starting in 1990.

Included in the square footage of new deals in the area is the new Scheel’s Sporting Goods and Target, both of which opened in the Legends at Sparks Marina. These two stores accounted for over 400,000 square feet of the 947,000 that was completed. Just think how bad the numbers would have looked like if these two stores hadn’t opened.

The overall vacancy ended the year at just over 13%, anchor vacancy was 10.6% and line-shop vacancy was 16.8%. So how do these numbers compare to previous years? Well, this is the highest overall and anchor vacancy rates our area has had in over 18 years (since we have been tracking the market). The good news is that the line-shop vacancy hasn’t hit the high watermark, at least not yet. The illustrious year to hold that record was in 1990, after years of overbuilding in the late 80’s, coupled with the savings and loan crisis and a national recession.

The pundits tell us we entered this recession in December of 2007. At that time, we had relatively healthy vacancy numbers. During the good years, developers didn’t overbuild the market with unoccupied shopping centers like they did in the late 80’s. What they were doing was building as many shopping centers as retailers wanted to occupy. If there was excess in this last bubble, it was with the retailers who kept increasing their store count by 6-12% each year to prove to Wall Street that they were “growth companies”.

In analyzing the past, we see there were cracks that started to show in 2007-2008. Wall Street analysts started telling retailers they were not seeing increased return in net profit that was expected with the new stores. Some of the biggest names across the nation including Wal-Mart and McDonald’s gave notice they were trimming their capital budgets for future store growth, at least in the domestic market. Looking back, I think these signals were some of the first signs that something was afoot. The old ways of doing business for these retailers was not working any longer.

These warnings correspond with the beginnings of the residential downturn. What started slowly in the “Alt-A” housing market has culminated in a torrent of foreclosures. Consumers have been swamped with bad news on their housing values, stock market portfolio’s and even the future of their jobs. Of course the consumers cut their spending. Any rational consumer would look for ways to insulate themselves from this constant barrage of bad news. This translated into some of the most dramatic cutbacks in consumer spending in recent history. In Washoe County, the taxable sales for October 2008 were 13.9% lower than the previous year. Although statistics for November through December have not been released, it is expected that those figures will show a continuation of the dramatic decline in sales tax revenue. The same thing is happening across the nation, to a greater or lesser degree depending on the local economy. When it comes to retailers, some of the retailers who were already precarious as they entered this recession have been taken under, which gets us back full circle to the vacancies.

We have 1.6 million square feet of vacant space in the Reno/Sparks market. We expected this figure to climb during the first half of the year and perhaps longer. No doubt, it will take us quite some time to work our way out of the excesses of the past. The most challenging part is that there will be fewer retailers left to fill in the gaps. However, the strong retailers will survive and even thrive in a less cluttered field. New retailers will eventually emerge to satisfy new consumer demand, which will no doubt re-emerge. There is a good case to be made that there could be a snap back at some point as consumers realize they need to replace their cars, washing machines, computers and a myriad of other items they have become accustomed to having. The consumer has been knocked down and trampled on, but they will recover.

We are already 14 months into this recession, while most recessions have lasted no more that 16 months. I think we are in for a longer downturn than most of the previous cases, but my hope is that we are closer to the end than might be apparent from what we can see right now. If a floor in the housing collapse can be found and job losses subside, it will give consumers a chance to catch their breaths. The consumer will no doubt recover with time, but their future spending may stabilize at a more conservative level than during the years of excess.

Monday, January 12, 2009

Speculative Industrial Construction Unlikely in 2009

Posted by: Carl Zmaila
Industrial Specialist
775 336 4623

All is not bad in the northern Nevada industrial market. The fundamentals for distribution and warehousing space to serve the eleven western states are strong.

One article in particular highlights this very subject. Rob Sabo, a journalist from the Northern Nevada Business Weekly, wrote “Speculative Industrial Development Unlikely this Year.” Mr. Sabo spoke with local experts about the northern Nevada industrial market and received a clear message. We are down, but not out.

Mike Hoeck, Senior Vice President at NAI Alliance pointed out in the article that people are looking but it is a lot of tire-kicking. Basically, interest in distribution and warehousing remains but everyone has been taken back by the aggressive deterioration in the national and global economy.

People are having a hard time finding rational arguments for predicating future revenue. Therefore the northern Nevada industrial market is experiencing a deer in the headlights effect. People know a good deal is out there but without solid predictors for their company on the macro scale they are frozen. But, experts in the northern Nevada industrial market believe that as the economy unthaws this industrial market in particular is well poised to bounce back quickly.

All predictions point to a strong 3rd an 4th quarter for the northern Nevada industrial market; relative to the position of the national and global economy of course. To read the entire NNBW article by Rob Sabo please click on this link Northern Nevada Business Weekly.

Monday, January 5, 2009

In Recession, the Smartest Owners are Renovating

Morgan Walsh - Multi-Family Specialist

Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646

Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential development and the development of affordable housing projects.

For apartment owners trying to manage in a recession, the textbook approach is to cut costs, retain tenants, refinance debt and dump under-prforming assets if necessary. In the current recession, widespread job loss means that vacancy in some submarkets is threatening to destabilize operating performance for some owners. The reaction has been to hoard cash and line up small capital loans to make it through.

The smart operators are also looking ahead and planning or executing strategic renovation. What's crucial to understand is how those operators define a 'renovation. ' It is not a capital expenditure to reduce operating costs, although such investments might be prudent if the reduction pays for the investment within two years. Ideally, the owner has already put such economies in place during the fat years when refinancing cash was readily available.

Likewise, renovation is not the replacement of building systems, structural components or new construction which preserves asset value, extends the useful life of the physical plant, increases ad valorem tax cost and disrupts the residents-- these steps will be deferred until borrowing is readily available to finance the work, a new owner steps in, or a casualty occurs for which substantial insuirance proceeds can be used for the purpose.

The renovation which owners have in mind is what will garner an immediate increase in monthly rent. In recent years, the median renovation for Washoe County was less than $ 5,000 per unit, bringing in a median rent increase of $ 85 per month and had a pack-back averaging 4.5 years. Assuming that 85% of the rent increase showed up in the bottom line, net operating income increased 9% on average, with building value climbing $11,000 per unit at an imputed 8 cap. Return on renovation investment approximated 45 % if the asset were sold and had a payback of 4.7 years.

Admittedly, some owners who want to renovate are skeptical they can increase rents anytime soon and have work planned but want to feel the bottom of the soft rental market first. Others lack the cash, and still others are hoarding cash against the worst case of operating performance. But three of the five conditions for the timng of optimal renovations are here: (i) units are readily available for renovation; (ii) labor is patient, flexible and hungry; and (iii) material costs are flat or falling, with trade vendors willing to deal. Seldom have renovations been cheaper or faster to install than now. And tenants, who have choices, are value-conscious.

The smart operator is working through the following process:

  • What's my serious competition and how do my units stack up ?
  • What work should I do to avoid functional obsolescence ?
  • Realistically, what amenities or improvements does the location justify ?
  • What improvements are most prized by the tenants I really want to retain ?
  • What can be done to continuously improve the curb appeal of my units ?

One highly sophisticated apartment owner we work with uses a clever technique to lock in the benefit of a renovation. Systematically, he asks the best residents, "We're going to raise rent for your unit by $100, and we want to know what improvements you would like us to consider that would make the extra rent worthwhile." And then , he follows through. It's the best mix of resident relations and value-add you could imagine.

As a broker, when I raise the issue of renovations with owners, I like to ask if the owner would spend $ 225,000 to acquire units worth $ 500,0000. Not one would turn down that opportunity. A skillful renovation delivers that level of return, without transaction cost, legal expense, financing risk or substantial delay..