Population shift, Hurricane Katrina, oil spill and recession affecting retail real estate on Gulf Coast
Retail leasing on the Mississippi Gulf Coast has been changing and shifting as a result of several factors, including the area’s geography, growth patterns, Hurricane Katrina and the recession.
Brooks Holstein, CEO of Comvest Properties, who’s had a long involvement with commercial real estate, says the Gulf Coast retail market now has three regional retail market points that have sufficient retail mass (current occupied retail space in excess of two million square feet) that qualifies the market points as shopping destinations.
“Due to the variety of retail offerings, a shopping destination market point will typically draw consumers from a minimum of a 30-mile radius,” he said. “The current three shopping destination market points in order of size and gross retail sales are Interstate 10 and U.S. Highway 49 in Gulfport; I-10 and I-110 in D’Iberville; and, Beach Boulevard (U.S. Highway 90) and Eisenhower Drive in Biloxi.”
He points out that retail occupancy has remained a healthy 90 percent despite the population loss due to Hurricane Katrina, the economic downturn and higher unemployment as a result of the recession. “The greatest demand for space has been in the 2,000- to 5,000-square-foot range as the regional and national dollar stores and other value-priced retailers aggressively increased their new store production taking advantage of lower rents, much more humble and tenant friendly landlords and the before mentioned ten percent vacancy,” he said.
“The deep discount fashion and shoe retailers were reporting record profits and same store comparable sales increases with many sitting on historically high levels of cash that made their retail format in demand tenant from 2008, and I predict that will remain the case through 2012 or longer.”
Monte Luffey, a principal with Southeast Commercial, lists the same high-traffic areas as popular, adding that U.S. 49 on the north side remains in demand around the new Sam’s Club, Best Buy and Crossroads Mall. “Future areas of growth will be around Edgewater Mall with the addition of the new Wal-Mart behind Edgewater Village,” he added. “This will create a lot of synergy with the mall and Wal-Mart being so close.”
He feels there isn’t much shifting going on, but due to the Coast’s linear area, anywhere along I-10 will remain good areas for retail locations as the busy interstate is the Coast’s main corridor.
Doug Molyneaux, director of acquisitions and investment sales with Comvest Properties, says all sizes of retail space are in demand at key interchanges. “It is difficult to lease large box space along Highway 90, but demand for small shop space is picking up,” he said. “Key intersections along Pass Road, such as Popps Ferry Road and Courthouse Road, have always been in demand and probably always will be.”
He sees a shift from U.S. 90 up to Interstate 10 as there are now fewer rooftops near U.S. 90 due to the 2005 storm and the slow economy. “Retailers are opening fewer stores and that means they are going for the A locations only,” he added. “I-10 is a more regional location.”
Holstein notes the population shrinkage and relocation that began after Katrina as confirmed by preliminary 2010 Census data. He predicts it will continue due primarily to homeowners insurance costs south of I-10, cost of residential construction for single-family construction to meet new federal wind codes south of I-10 and the post-Katrina 19-plus-foot minimum first floor storm surge residential elevation. Automobile dealerships are leading the retail migration to I-10, a shift that started as early as 1990.
“Rents vary by shopping center class, city and even by intersection within each city,” Holstein said. “Traffic counts, area demographics, particularly income, average age of the residents, and the highest level of education attainment will greatly affect rental rates.”
Additionally, he says co-tenancy, the amount and quality of the other tenants in the shopping center and their tenure and sales performance equally influence the landlords’ ability to obtain a higher rental.
“At the end of the decision-making matrix of the retail tenant, the deciding factor is how much sales can the proposed location generate per year? And what percent of the projected gross revenue is that location’s total occupancy cost? Each retail category has within a percentage point or two what percent of total occupancy cost their company is willing to operate in order to comfortably earn their board of director’s established internal rate of return, return on cost or return on equity.”
Luffey says the cost per square foot is from $20 to $26 in the popular areas such as the Promenade and Crossroads, but is $18 in the not-so-popular areas.
Rental rates vary from property class to property class as well as location to location and co-tenancy, according to Molyneaux. “I have seen proposals as high as $28 per square foot at new class A properties and as low as $5 per square foot in older redeveloped deals,” Molyneaux said. “The retailers that are doing the best in this economy are value priced or discount stores. The demand for these types of stores seems to be in the $7 to $10 per-square-foot range in quality redeveloped properties.”
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