Panelists at last week’s Real Estate Finance Association program on the retail market include: (from left) John Riordan, chairman of the Center for Real Estate at the Massachusetts Institute of Technology; FleetBoston Financial Executive Vice President Ronald Lubin; and Tom Laczay, partner, DJM Asset Management.

Anyone shopping for good news about commercial real estate is unlikely to find it in the retail sector, or so it would seem after listening to a panel of experts who gathered last Tuesday at a Real Estate Finance Association forum in Boston.

Coupled with the already dour economy, the World Trade Center and related terrorist attacks last month have made prospects for a rebound in the retail market unlikely in the foreseeable future, said panelist John Riordan, chairman of the Center for Real Estate at the Massachusetts Institute of Technology.

“What happens at Christmas is a big question mark,” Riordan told the audience on hand at the Goulston & Storrs law firm. “How are you going to get people to sing ‘Jingle Bells’ right now? That’s a tough one.”

Riordan, formerly president of the International Council of Shopping Centers, said the tragedy comes at a particularly difficult time for retailers, with sales already slow for most of 2001. The ICSC’s latest figures reported an increase in same-store sales of just 0.4 percent for July, a figure that Riordan said essentially amounts to no growth. The only area to see substantial activity was in women’s ready wear, which was up by 6 percent.

“Virtually every other category is down,” said Riordan.

Such negativity has carried over to the retailers themselves, added Brian Kelly, a principal with Eastern Development. Kelly, who has brokered more than 300 retail leases in recent years, said the uncertain economic times have combined with other factors such as industry consolidation to dramatically reduce the potential tenants for a given property. That is especially true for anchor space at shopping malls, he said, where “you have just a handful of calls to make today” when courting prospective tenants.

Some players are only willing to take leases in triple A locations, Kelly said, while so-called “junior anchor” tenants such as Staples are no longer willing to accept excess space in a deal as they previously might have done. “Before, if they could take down more space, they would,” Kelly said, but now “they are just being more cautious in their real estate.”

‘Pick Your Spots’
One current example of the measured approach occurred last week with the distribution of leases disposed as part of the bankruptcy of Bradlees Department Stores. Of the 114 leases available for transfer, 15 went to Kohl’s, 13 to Wal-Mart, 12 to Stop & Shop and six to Home Depot. Another six were purchased back by landlords. Nearly half of the leases found no takers, however, with more than a dozen to be sold at auction and another 39 rejected outright and returned to the landlords. None were acquired by “junior anchors,” Kelly noted.

One company that has kept busy amidst the turmoil is DJM Asset Management, which specializes in evaluating, marketing and repositioning owned and leasehold assets, usually when a struggling retailer is trying to regroup or is going through a bankruptcy. Partner Tom Laczay spoke on the trends in that arena, and acknowledged there is plenty of business for his company to handle at present. Among the companies DJM has worked with recently are General Cinemas, the Children’s Place and Hit or Miss.

While there is no shortage of companies in need of restructuring, Laczay said he has seen buyers of leasehold assets increasingly head for the sidelines, especially in the wake of the Sept. 11 incidents. Nearly a quarter of the bidders on the assets of retailer Track and Trail pulled out of the running prior to their disposition on Sept. 21, Laczay said.

“A lot of brakes have been put on deals for the time being,” Laczay said. “We’re definitely hearing caution as the watchword.”

Similar reticence can be found among lenders for retail properties, said Ronald Lubin, executive vice president at FleetBoston Financial and moderator of the REFA program. “Clearly the market is as turbulent as it has ever been,” said Lubin, whose division has more than $1.5 billion in its shopping center debt portfolio at present. Lubin said he anticipates further retrenchment, at least through the end of the year.

For all of retail’s woes, as evidenced by the onslaught of companies going out of business, most of those speaking at the program insisted the situation could be worse in New England. Riordan said the region has far less retail space than other parts of the country, especially for major users.

“Building [retail] here is as difficult as it is anywhere in the United States, and it is likely to remain that way,” he said. Along with the lack of available land, Riordan blamed the attitude of locals, who are more than ready to fight a Home Depot or Wal-Mart or big-box retailer whenever those players attempt to set up shop in a community.

Riordan explained that New England lags other regions in terms of percentage of sales to large-scale retailers. Some 64 percent of Massachusetts retail purchases come from such stores, he said, compared to 73 percent in Mississippi and 84 percent in Arizona.

“By inference, if we had the right to build large-scale retail here, that [percentage] would change,” Riordan said.

Indeed, Kelly said, it is wise for a retailer to evaluate a market at the outset and determine how difficult it will be to get a property permitted. That is important, he said, not only in ensuring that one’s permit is accepted, but can also be attractive if a tenant wants to shut out future competition.

Given the difficulty of breaking into some markets with new construction, Kelly said some major tenants are willing to shoehorn themselves into a smaller, existing space if that is what it requires. That occurred with the Home Depot, which eschewed its prototype to relocate into the former Ann & Hope store in Watertown.

Even with the sluggish economy and the barriers to entry, Kelly said, leading retailers are still interested in expanding into the Bay State, with his firm currently handling 25 significant deals.

“There still is activity out there,” he said. “You just have to pick your spots and proceed cautiously.”

Experts Don’t Expect Rebound For Retail in Foreseeable Future>