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SMOKIN' HOT: Taking Stock of the Nation's Leading Retail Markets

Spotlights On Phoenix, San Jose, New York City & Chicago
August 8, 2007
CoStar's recently released Mid Year 2007 National Retail Report (available to all CoStar Property Professional subscribers and also available for purchase ) provides a detailed view of retail rental rates, vacancy, construction, and sales activity across the major metropolitan areas CoStar tracks in the nation.

In this article, CoStar shines the spotlight on the country's "hottest" retail markets, gleaned from the statistics revealed in that report. We interviewed numerous CoStar Power Brokers in the respective markets to explain the driving factors behind these rankings.



MARKETS WITH THE MOST RETAIL SQUARE FOOTAGE UNDER CONSTRUCTION

SPOTLIGHT ON: Phoenix, Arizona



At the close of second quarter, Phoenix led the nation with the most retail square footage under construction -- 13.4 million retail square feet. The fast-growing MSA accounts for 6.4% of the nation's total retail square footage under construction and outranks the next-closest market, California's Inland Empire, by 1.78 million square feet. In addition, Phoenix boasts an impressive overall 82.8% pre-leased rate on these projects; the second highest pre-leased rate nationwide.

CoStar interviewed three 2006 CoStar Phoenix Retail Leasing Power Brokers, Matt Milinovich, Jeff Alba and Jason Fessinger of Strategic Retail Group (pictured below, from left to right), to tell us why retail developers are "gaga" over Phoenix. It turns out in large measure they are simply following the rooftops.

"Metro Phoenix is experiencing tremendous population growth. There a lot of people moving here from other states," said Milinovich. "In addition, Phoenix has very low unemployment, very good job growth, and a relatively low cost of living; all of which is helping to draw people to Arizona. Entry-level new homes can still be found for less than $200,000 in several parts of the valley. As new people arrive, they're buying new homes in high growth parts of our market where retail developers are planning and building creative retail projects. Our new home growth has slowed, but the level is more sustainable than the heated growth we experienced in the last few years," he added.

US Census and Bureau of Labor Statistics (BLS) estimates back up those assertions. The Phoenix area experienced 23.2% population growth from 2000 to 2006. Unemployment has decreased from 3.7% to 3.0% and the workforce has grown by 2% over the past year while authorized housing starts are down 14% over the past year.

According to Alba, "Most of our retail development is following the Loop 101 & Loop 202 freeway system, which provides access to these new home communities and allows retailers to tap easily into these suburbs [he listed the communities of Gilbert, Chandler, Glendale, Peoria, Avondale, and Goodyear as prime examples]. A lot of new regional power shopping centers are dotting the Loop Freeway system and bringing regional retail tenants closer to the suburbs."

As one of the area's leading retail tenant representatives, Strategic Retail is attuned to the parade of retailers entering and expanding in the region. "Phoenix tends to get a lot of new retail concepts coming to the market after the concepts have been tested or expanded in California or Texas," said Fessinger. "We're also seeing a lot of aggressive retailers entering our market with large rollouts because we have plenty of opportunities for retailers to find suitable infill locations and at the same time jump into high growth areas to achieve deep market penetration in a reasonable time period."

Fessinger cited Tesco PLC, the giant European firm entering the U.S. with small-format Fresh & Easy Neighborhood Market grocery stores, as an example of a tenant coming to Phoenix with aggressive expansion plans. The retailer reportedly picked Phoenix as its choice market to enter the U.S., due to its "rapid growth." Fresh & Easy has 26 sites on its Phoenix area map of stores and is setting up an 1-million-square-foot distribution center in the area. For more on Tesco/Fresh & Easy, click here.

About Phoenix's strong pre-leasing rate, Milinovich credited the retail developers, "We have a very low vacancy rate in the Phoenix retail market and very solid retail demand. Most of the new retail development is still pre-leasing at a good rate despite the new home growth slowdown due to proper planning, creative retail projects and good job and population growth."

TEMPE MARKETPLACE - Largest Retail Project Under Construction in Phoenix
Location: SWC Loop 101 & Loop 202 Freeways, Tempe, AZ
Type: Power, Lifestyle, Entertainment Center
Square Feet: 1.3 Million sq. ft.
Delivery: Majority Delivery Fall 2007 (Harkins Cinema and several retailers are already open)
Major Tenants: Target, Sam's Club, JC Penney, Harkin's Theatre, Victoria's Secret, Dave & Buster's, Best Buy, Ross, Linens-N-Things, Sports Chalet, Old Navy, GAP, Guess, CPK, American Eagle, The Buckle, Lucille's BBQ, King's Fish House, and more.
Developer & Leasing: Phoenix, AZ-based Vestar Development Company
CoStar Property ID#: 924268

Tempe Marketplace is not only the largest retail project under construction in Phoenix, but also one of the largest under construction in the country. It is located at the intersection of Phoenix's two main freeways, Loop 101 & Loop 202; which produce a traffic count of 650,000 cars per day in a redevelopment district one mile away from the Arizona State University campus. The property's design has power center tenants located on the perimeter, with lifestyle tenants bordering the Salt River and leading to the theatre. According to project developer, Vestar Development, "What makes the project unique is we're combining large, destination-type, power center tenants with a 400,000 square-foot lifestyle center, anchored by a theatre, all at one site. It will serve the entire Phoenix market." Vestar also said that interest in Tempe Marketplace is strong, as big boxes were fully leased two years before delivery.


(Editor's Note: In this article we invite CoStar Group newsreaders to comment on this article. The story will be updated regularly throughout the day. We'd like to post your comments on the Nation's hottest retail markets, too. Tell us what you think. E-mail me at spardy@CoStar.com. Read excerpts from pertinent follow up comments at the end of the story as they are added.)



MARKETS WITH THE LOWEST OVERALL AVERAGE RETAIL VACANCY RATES

SPOTLIGHT ON: South Bay / San Jose



At the close of second quarter, South Bay / San Jose was the market with the lowest overall retail vacancy rate. At 2.6%, the San Jose's retail vacancy rate is 420 basis points lower the national average and 30 basis points lower than the next closest market, San Diego. In addition, San Jose's average shopping center rental rate ($42.56-per-square-foot) ranked as the highest in the country at the close of second quarter.

CoStar interviewed Joe Dimitrio, a 2006 CoStar San Jose Retail Leasing Power Broker and a director at national retail disposition firm DJM Realty, to explain why San Jose maintains such a tight retail market.

"Physical and governmental barriers to entry are two of the factors contributing to San Jose's low retail vacancy and high retail rents," said Dimitrio. "Land is scarce throughout Northern California on the most desirable roads, development costs are high, it's becoming more and more difficult to get permits and approvals to build new, and the legislature has limits on the positing of new big boxes in the cities. All of which decreases a developer's ability to build new, driving demand and increasing rents," he explained.

"The pace of retail store expansion plans has outrun shopping center development, especially in California," Dimitrio continued. "Since the ability to build new isn't there, retailers have a hard time penetrating and are willing to pay for space to get into the market."

Dimitrio offered disposition client Good Guys, a former big box electronics retailer, as an example. "Rents have been increasing since 2001 steadily. We had received a portfolio of 58 Good Guys stores to dispose of - they were roughly 20,000-square-foot boxes - what we found was that at the time the leases were signed the lease rates were perceived as extraordinarily high. When 2003-2004 came, those rents had become market rents and retailers were lining up to take over those leases at those rates."

"Anything along the shore in California doesn't have a problem leasing space - it's an unbelievable retail area. Any kind of property that's halfway decent is going to have multiple users all over it. San Jose is another one of those great markets in California - it's close to Concord, close to San Francisco - its just like New York City - tenants are willing to pay to get in there. With our experience in this market I can tell you that, in comparison to the country, this market is one of the quicker locations for us to find a suitable tenant. A lot of times, landlords might even take a space back because they know they can get a better rent than what my disposition tenant was paying," explained Dimitrio.


(Editor's Note: In this article we invite CoStar Group newsreaders to comment on this article. The story will be updated regularly throughout the day. We'd like to post your comments on the Nation's hottest retail markets, too. Tell us what you think. E-mail me at spardy@CoStar.com. Read excerpts from pertinent follow up comments at the end of the story as they are added.)



MARKETS WITH THE HIGHEST OVERALL AVERAGE QUOTED RETAIL RENTAL RATES

SPOTLIGHT ON: New York City



With absolutely no element of surprise, New York City eclipses all other retail markets by having the highest overall average retail rental rate at the close of second quarter. At $68.26-per-square-foot, New York City's average retail rental rate is more than $50 greater than the national average and $30 greater than the next-closest market, South Bay / San Jose. In addition, New York City boats a low average retail vacancy rate of 5.4%.

Faith Hope Consolo a 2006 CoStar New York City Retail Leasing Power Broker and chairman of the retail leasing and sales division for Prudential Douglas Elliman , provided her "in-the-know" take on New York City's retail market.

"There are so many consumers on New York City streets -- residents, workers and tourists. We have so many visitors and that's increased over the last 18 months by an influx of European tourists - we're now head-to-head with Las Vegas on tourism," said Consolo

That large concentration of consumers is one of the reasons why retail space is so sought-after in New York City, Consolo explained. "We have 250 retail districts here. A retailer can have a store in almost every neighborhood without cannibalizing its business. Most of the retailers who are already here have multiple locations for that reason, and because sales-per-square-foot far exceeds anywhere else. On the great retail streets of the city, cash registers are running all day, seven days a week." According to Consolo, sales-per-square-foot examples for prime locations in Soho and on Fifth and Madison avenues can ring up sales of $1,700-per-square-foot, and for luxury retailers, $2,000 to $2,500-per-square-foot.

Commenting on New York City's retail rental rate history, Consolo said she and a business partner were discussing the market and agreed, "these are the highest rents we've seen and we've been doing this twenty years. Rents are really off the charts now."

Consolo said retail rents in the city were pretty high just before 9-11. For example, she said, Soho rents were $400 to $500-per-square-foot. Today, Soho is almost back to that same number. Fifth Ave. is at $1,700-per-square-foot and Madison Avenue $1,100 to $1,200-per-square-foot. "And then there are areas that have exploded, like the Meat Packing District. A few years ago rents there were $75-per-square-foot, now they're $350-per-square-foot."

Retailers may flinch at first, but they quickly get over the sticker shock, said Consolo. "Numbers are just numbers, there's no rhyme or reason because everyone wants their face on New York City streets. Retailers at all price points. It's the jumping-off point for anyone who wants brand recognition. For example, I'm seeing European and Asian retailers vying for space in the city to enter the U.S. market."

Commenting on neighboring Long Island, the fifth-ranked retail market for average asking rent in the nation, Consolo said, "There's lots of great projects out there. The Miracle Mile, Taubman's Oyster Bay, plenty of retail in The Hamptons, on the North Shore, etc. All the Big Boxes want to be there, designers want to do multi-brand concepts in malls there; the tenant lineups on the new projects are great."

Consolo explained that Long Island's surge from being an "under-stored Mom & Pop" area to a retail growth is largely due to investment in infrastructure that has improved traffic congestion issues. "There's now a lot of renovation going on. The big guys are putting money into Long Island and when you see that, retailers know they need to be there."


(Editor's Note: In this article we invite CoStar Group newsreaders to comment on this article. The story will be updated regularly throughout the day. We'd like to post your comments on the Nation's hottest retail markets, too. Tell us what you think. E-mail me at spardy@CoStar.com. Read excerpts from pertinent follow up comments at the end of the story as they are added.)



HOTTEST RETAIL PROPERTY SALE MARKETS

SPOTLIGHT ON: Chicago
Following the patterns of high retail rent and low retail vacancy already tackled in this article; New York City and California markets rank as those with highest average sale-price-per-square-foot statistics, lowest cap rate statistics, and highest sales volume statistics due to high pricing. To give some other markets a chance, we took a closer look at saw the most retail square footage sold during the first two quarters of 2007.



As pictured in the chart above, Chicago ranks as the market with the most retail square footage sold during the period. Nearly 7.83 million square feet changed hands in the market, 1.5 million more retail square feet than the second-place market, Philadelphia.

In addition to being among the largest metropolitan areas in the country with reasonable pricing and average cap rates, Chicago' $172-per-square-foot falls almost smack dab in the middle of the 52 metropolitan markets we looked at for this survey, and is only slightly higher than the national average. In addition, its 7.1% average cap rate is right in line with the national average.

Retail developers are also increasingly identifying Chicago as a target. The market ranks third in terms of total retail square footage under construction (see chart at top of page), although the pre-leased percentage on those projects is only 55%, indicating the market has cooled and is leveling off. According to the Census Bureau, Chicago's housing units authorized has declined about 34% over the past year; reaffirming a "return to the norm".

Chicago has long been known as one of the highest profile retail areas in the country and with more than 9.5 million residents is one of the Nation's largest MSAs. The market's population has grown more than 4% since 2000, as according to 2006 Census Bureau estimates. In addition job growth is recorded at a pace of about 2% annually and Tourism continues to rise.

ORCHARD PLACE - Largest Second Quarter Chicago Retail Sale
Location: 4801-4869 Golf Road, Skokie, IL
Type: Community Center
Square Feet: 90,000 sq. ft.
Tenants: Linens-N-Things, Staples, Golf Galaxy, Cole Taylor Bank
Seller: Orchard Place Retail, LLC
Buyer: Marc Realty Services of Chicago
CoStar COMPS ID#: 1310394

So why did a community center sell for $40 million? That sale price translates to $440.55-per-square-foot, more than twice Chicago's retail average. Orchard Place is adjacent to the major regional mall of Skokie, the 1.8-million-square-foot Orchard Place Center, which is anchored by Nordstrom's, Saks, Bloomingdale's, and Lord & Taylor. In addition, the trade area boasts an average household income of $100,000.


(Editor's Note: In this article we invite CoStar Group newsreaders to comment on this article. The story will be updated regularly throughout the day. We'd like to post your comments on the Nation's hottest retail markets, too. Tell us what you think. E-mail me at spardy@CoStar.com. Read excerpts from pertinent follow up comments at the end of the story as they are added.)

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