The Retail Outlook
Vacancy is still high and rents are low, but things are better than three years ago
As consumer confidence wanes in this global economic crisis, people are spending less at stores. It’s had a significant “trickle up” impact on retailers and ultimately shopping center owners, notes local attorney Christopher J. Dodge. “We’re seeing more vacancies, rentals reduced and, sadly, the loss of many new and established businesses throughout the area,” he says.
“Although Class A space seems to be remaining occupied, this may be due in part to reduced rents, allowing what would otherwise be Class B tenants to move into better space at more reasonable rental amounts,” he adds. “Unfortunately, this means we’re experiencing a growing vacancy in Class B and C space in Madison.”
Blake George, principal at Lee & Associates, sees the glass as half full. “In Dane County we’re seeing lower vacancies in retail overall than during the recession,” he says. “There’s very little new construction, although a few buildings have gone up, like Aldi and Taco Bell in Fitchburg.”
When consumer spending began to fall several years ago, “dooms-dayers” predicted half of area retailers would go out of business, George recalls. “But it never came to fruition. Retailers cut back staff and inventory, and those with solid business models retained profitability.
Better Than the National Market, But Still Suffering
While Madison appears to be stronger than the U.S. economy as a whole, it’s certainly suffering, as evidenced by the numerous bankruptcies, business failures, closures and empty retail space. “We’re also seeing a trend away from the large enclosed malls in favor of drive-up, ‘lifestyle’ retail stores,” observes Ronald M. Trachtenberg, shareholder at law firm Murphy Desmond S.C. “Hilldale is a good example of this. While the drive-up stores seem to be doing well, the enclosed mall itself is having issues.”
His firm assists both shopping center owners and retail tenants with a full range of services. “From the owner’s perspective, we have multiple attorneys experienced in areas such as land acquisition, governmental approval and entitlements, entity formation, financing and contractual negotiations, including preparation of leases and other documents needed by the shopping center owners, along with utility and easement work,” he explains. “We can deal with complex issues including multi-parcel concerns, condominiums, covenants and restrictions and use and design issues.”
Murphy Desmond provides similar services to retailers, including assistance in location and negotiation of leases, contracts, build-out negotiating, financing, entity formation and all other legal needs for shopping center tenants.
George notes financing is still an issue. “Banks are reluctant to lend and that’s constrained construction in the retail area, which allows vacancies in existing space to decrease. But retail is leading the recovery in commercial real estate, just like last year.”
Lee & Associates helps retailers buy land to build on or find property to lease. “It could be strip centers, malls or a freestanding building like a McDonalds,” says George. “We also help developers, representing them in leasing opportunities or land sales.”
We’re Through the Worst
George foresees continued stability in the Dane County retail market. “We’ve gone through the worst of it and we’re not going backward,” says. “Retailers that made it through feel confident in moving forward. Once they get personnel under control, the biggest issue is health care. They’re proceeding cautiously, but they’re proceeding.”
The lack of liquidity in banking and the accompanying constraint on construction will continue into next year. “Landlords aren’t able to do speculative deals. It used to be, if there was enough indication we needed another retail building, banks would let them put it up if it was 50 percent rented,” says George. “Now it has to be 100 percent rented for new construction, which is very difficult to do.”
Still, many retail tenants have been pleasantly surprised by their success. “They thought when they moved into their space they’d struggle—they assumed the worst,” George notes. “But with the deals we’ve made they’re doing surprisingly well.
“It has to do with the lack of competition in the last three years,” he adds. “Fewer people have started businesses. But the more savvy retailers, sensing the lack ofcompetition, have done good deals and entered the market.”
— Judy Dahl