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Retail property outlook continues to improve

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Public and private owners of large shopping center portfolios are hungry for more assets if they can find them, experts said during a Jan.11 meeting.

The state of the retail property market was discussed during an International Council of Shopping Centers-sponsored gathering at the Del Mar Marriott.

The session came as the Blackstone Group (NYSE: BX) and DDR Corp. (NYSE: DDR) announced plans to purchase some 10 million square feet of shopping center properties in Massachusetts, Ohio, Minnesota, New York, Texas, Illinois, Florida, Connecticut, Colorado and Kansas for $1.4 billion.

Jeff Chambers, senior director of development and acquisitions at Federal Realty Investment Trust (NYSE: FRT) -- which purchased nearly $500 million worth of retail property in 2011 -- said his company likes to buy centers in coastal regions if possible.

Federal Realty owns at least two properties here -- the 297,000-square-foot Escondido Promenade and 35,000-square-foot retail property at 643-653 Fifth Avenue in the Gaslamp Quarter.

"We like to go into areas including San Diego where there are high barriers to competition. The problem is, for what we are looking for, there's not a lot of supply," Chambers said.

Chambers noticed something else: As online retailing continues to grow, brick-and-mortar stores are getting smaller.

For example, the new Kohl's (NYSE: KSS) stores are closer to 65,000 square feet than 100,000 square feet, while Office Depot (NYSE: ODP) has emerged with a smaller 5,000-square-foot concept store than a more traditional building of perhaps 20,000 square feet or larger.

Whole Foods (Nasdaq: WFM) has shrunk its stores by about 11 percent, and Best Buy (NYSE: BBY) and others are subleasing out space to tenants that complement their stores.

Chambers said what is surprising about the reduction is sales within the stores seem to still be about 90 percent of what they were before.

Chambers said brick and mortar and online shopping don't always have to be at odds.

"About 25 percent of Pier 1 customers will go online before they come into the store," he added.

While the retail landscape is changing, John Vorsheck, Marcus & Millichap regional manager, said it looks a lot better than it did a year ago.

"The worst is behind us," Vorsheck said. "The overbuilding we saw in the 1990s didn't happen this time around, and the gains in occupancy are pushing slight gains in lease rates."

Retail lease rates continue to vary, depending on the property's quality, age and location.

Vorsheck said he had seen rates as low as 80 cents up to $3 and more in some areas.

Like Chambers, Vorsheck noticed there are few large retail properties available.

"Of 173 transactions (Marcus & Millichap) had in San Diego last year, only nine of them were for more than $10 million," Vorsheck said. "There's a tremendous amount of money sitting on the sidelines."

When the money returns to the market, lenders may be particular about not only the type of center, but also its ratio of anchors to inline shop space.

Spencer Plumb -- Excel Trust (NYSE: EXL) president and chief operating officer, whose firm acquired $265 million in retail property nationwide in 2011 and has a $700 million portfolio -- said, "We like a higher anchor-to-shop ratio."

Sometimes retail centers may seem almost indistinguishable from each other, due to numerous shared national or regional tenants, while signature properties such as Seaport Village help define the bayfront.

Steve Bowers, Terramar Retail Centers president and CEO, heads a firm with the challenge of updating what has become an icon, without transforming into something that will be at odds with the waterfront.

This effort is in conjunction with the the Old Police Headquarters which is expected to have an entertainment venue as its lead tenant. Getting tenants for the OPH hasn't been easy, however.

"The challenge is to get from letters of intent to leases as well as weave the Old Police Headquarters with Seaport Village -- where the lease is expiring in 2018," Bowers said.

Including Seaport, Terramar has 22 centers with about 3.5 million square feet.

Some retail landlords, meanwhile, would just like their tenants to pay rent.

When Robert Thorn, a partner with the law firm of Kimball, Tirey & St. John asked landlords in the audience if they were allowing tenants to stay rent-free just to keep properties from going dark, about a dozen hands went up.

Thorn said now, more landlords are fed up and are kicking tenants out.

While there may be many challenges for owners and master leaseholders of retail property, Gary London, of The London Group, said there are many reasons to look ahead with confidence.

"We have been through a long economic event that arguably started in 2005, but the economy is slowly recovering," London said. "We're two or three years off from a burst of new real estate development, and I view that as an optimistic thing."

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