Real Estate Investing: While other sectors slump, retail remains a hot property

We’ve heard a lot lately about problems in the residential market, the office market has been slow, and manufacturers seem to be leaving a number of industrial plants in the state. However, retail continues to be the bright light in all of this darkness, providing investment opportunities for those who like and are familiar with this asset class.

Let’s take a look first at recent significant sales:

• In Pelham, Plaza 38, a grocery-anchored center, was sold on Aug. 14 for $12.2 million. (This sale has caused some concern about the assessment process related to commercial property in Pelham, since the selling price was significantly higher than the assessed value.)

• In Derry, Kershaw’s Plaza, a convenience center, was sold on Aug. 31 for $1.25 million.

• In Londonderry, four vacant lots in front of the Shaw’s Plaza were sold on Sept. 7 for $1 million. The site will be developed with three buildings, one housing a Starbucks, another KFC and Taco Bell, and the third with Verizon Wireless, and perhaps another retailer or two. Ground has already been broken for the project.

• In Manchester, Harvey Industries sold its site on Huse Road on Sept. 14 for $10 million to Samuels & Associates, which will be putting up a Lowe’s store of about 157,000 square feet.

• In Derry, the new Walgreens on Crystal Avenue was sold on Sept. 21, for $7.344 million.

• On Sept. 28, several Friendly’s Ice Cream sites were sold, primarily to O Ice LLC, apparently in connection with the sale of the parent corporation. Affected sites were in Concord, Dover, Exeter and Portsmouth.

There also has been a significant amount of construction going on. Here’s just a sample:

• In Merrimack, Chris Ross is planning to add 21,000 square feet to Sawyer’s Landing on the Daniel Webster Highway.

• In Hudson, Manny Sousa is completing construction of Nottingham Square, a 50,000-square-foot retail center, and tenants have been moving in.

• In Derry, Wal-Mart is planning a new 225,000-square-foot superstore off Ashleigh Drive, and will look for a tenant for its current 110,000-square-foot center on Manchester Road.

• Also in Derry, work has begun at Shute’s Corner on a new three-building retail center, including a 14,000-square-foot Rite Aid, a bank and an Irving gas station, with perhaps a Dunkin’ Donuts and a sandwich shop. Renovations have been ongoing at Hood Plaza, where Planet Fitness has taken some space, and a new Tire Warehouse is scheduled to be built on a site on Tsienneto Road. Finally, a bank is interested in building on the site of the former Jade Orient restaurant on Crystal Avenue directly in front of the Hood Plaza.

• In Londonderry, construction is ongoing at the new Mr. Steer Marketplace on Buttrick Road, directly across Route 102 from Mr. Steer’s current location. The plaza will be 11,400 square feet, with up to seven units.

• In Tilton, the Tanger Outlet Mall is expanding with the construction of a 17,700-square-foot free-standing building that will house Old Navy.

• One of the biggest news items in retail real estate recently was the vote in Hooksett to authorize the town council to negotiate an agreement with Cabela’s to bring the company to a site at Exit 11 off Interstate 93. The building will be constructed in a new TIF zone created to encourage retail-related development. The new Cabela’s, along with all of the additional retail and hotel businesses it will attract, will generate significant property tax revenue for the town. A spring 2009 store opening is possible.

All of this activity begs the question of why retail real estate is so hot, and why demand far outstrips supply.

Like any other type of investment play, retail real estate offers cash flow, appreciation and tax benefits. While location is a critical factor with all types of real estate, it’s even more important with retail properties. The reality appears to be that our population is still growing, albeit more slowly than it has in the past, and retailers, especially the “nationals,” believe that certain areas can accommodate more stores.

Only time will tell whether there is overbuilding of this type of real estate. In the meantime, CAP rates for quality retail properties remain lower than for other property types, although they have risen somewhat lately with the national credit crunch and tougher underwriting criteria.

On another front, the “green” movement continues to take hold.

The Greater Manchester Chamber of Commerce now has a Green Committee, in response to overwhelming interest on the part of almost 600 chamber members. The committee plans to hold a program on March 25, 2008. Retail property owners are well advised to learn as much as they can about new developments in this area in order to maintain their competitive position in the marketplace.

Tenants are becoming more sophisticated in this regard and are asking whether new buildings meet Leadership in Energy and Environmental Design (LEED) standards. And legislators are looking into this as well.

I recently received two action alert e-mails, one from the International Council of Shopping Centers and the other from the CCIM Institute, each urging action to oppose a bill that would propose raising the tax rate on “carried interest” from 15 percent to 35 percent. It’s not entirely clear who is being targeted by this proposal.
The ICSC says that over 45 percent of partnership tax returns are filed by real estate partnerships, and this bill will more than double the taxes on the general partner.

Stay tuned for further developments.

Dan Scanlon, a retail investment adviser with Grubb & Ellis|Coldstream Real Estate Advisors Inc., Bedford, works with owners of privately held investment real estate in southern New Hampshire. He can be reached at 603-206-9605 or at dscanlon@coldstreamre.com.