Local Retail Vacancies Soar

Space is tough to lease these days, no question about that. Here's an article which appeared this morning in the Sarasota Herald Tribune.

U.S. 41: DOWNTURN DRIVE
Tough times for Tamiami Trail businesses

By Lauren Mayk

Published: Sunday, March 29, 2009 at 1:00 a.m.

This is the first of four stories about how the recession is changing the way local businesses buy, sell and survive.

The economy has changed the Trail.

There are fewer dinners out, smaller staffs and weakened sales. At one beauty salon in North Port, there is even a post office.

When customers started stretching out the time between haircuts and color appointments, Stella Derby went after a contract with the U.S. Postal Service. She now takes mail and sells stamps in the front of her Modern Beauty salon on Tamiami Trail. Signs point patrons to separate entrances for the salon and post office. The idea was to increase exposure for the 30-year-old salon, and nine months later, it seems to be working.

"Every week I get a couple, two, three new clients," Derby said.

Her strategy is one among many that business owners along Tamiami Trail are cobbling together in the midst of a painful downturn that has given some of them the choice between creativity or closure. Traffic along the Trail drives the pulse of commerce and consumerism in Southwest Florida, and it has slowed to a crawl.

There are the obvious indicators: shuttered restaurants, liquidating big boxes and "out of business" signs, but there is also pain inside the businesses still open -- even some that have cars in the parking lot and sales on their books.

Owners are discounting heavily, taking double-digit sales hits and worrying about what comes after the tourist season.

"The whole idea of season is to build up a little bit of cash, and that's not going to happen," said Simon Mendez of Simon's Quality Used Furniture. "You think it's bad right now with people closing down? Wait for summer."

Last year, consumers spent $2 billion less in Southwest Florida than they did in 2007, data from the Florida Department of Revenue shows, with gross sales down 10 percent in Sarasota County, 10.2 percent in Charlotte County and 4.1 percent in Manatee.

For December, the most recent month available in detail, regional sales were down 9.9 percent. The drop-off was about 10.2 percent in Sarasota and Manatee and 7.7 percent in Charlotte County.

Figures for more recent months are not out, but Trail business owners will tell you that despite the tourist season, the (non)spending trend has continued. "This was the worst January I ever had," said Craig Cook, who has owned Amber's Jewel Box in North Port for 11 years. His January sales were off 60 percent.

The Herald-Tribune interviewed more than 50 business owners, employees, real estate professionals and business experts about life along the Trail these days.

There are bright spots and there is determination to evolve with the economy, but there is also an overwhelming feeling of tough times along Southwest Florida's commercial heart.

Vanishing customers

Kamlesh Kadiwar saw sales at his combination gas station, convenience store and deli at Tamiami Trail and River Road in south Venice start to nosedive in April 2007.

Countywide, the decline took a few more months to show up at gas stations, state data show, happening about the time gas was topping $3 in spring and summer 2007.

Sales at Myakka River Trading Co. dropped 25 percent from 2006 to 2007, then sank another 50 percent from 2007 to now.

Kadiwar's business also lost another bigger transaction. "We were under contract for sale for a while and when the recession hit, they backed out," he said.

The station and store, advertising a "1/2 lb. of our famous chicken wings" for $3.79, used to see a steady stream of construction workers, but Kadiwar figures traffic is down from 700 people a day to 300.

The staff has been halved. Kadiwar employs just three others, taking evening shifts himself.

Another challenge is looming, a requirement that stations change their tanks from stainless steel to double-walled fiberglass this year. Kadiwar says the switch would cost $275,000. "We're not going to be doing it. We're going to stop selling gas unless the situation changes," he said.

Stations like Kadiwar's in Sarasota County saw a 41.5 percent drop in sales in November compared with a year ago.

More broadly, the trend was negative that month in about 70 percent of the roughly 80 categories used by the state to break out sales for the county. Many dropped more than 20 percent, including automotive dealers at 32 percent and boat dealers at 52.8 percent.

Sales of household appliances took a 51.7 percent dive, while home furniture, furnishings and equipment -- tied closely to movement in real estate -- were down 20.15 percent. The bright spot was that some furniture retailers report a boost from customers who have just bought homes in the area. With home prices down, buyers have extra money to decorate.

On the other hand, some custom furnishings are ending up back on the sales floor after customers (who only paid for part of the total cost as a downpayment) fail to pick them up.

Traditional retail categories that depend on discretionary income continued to fall, with restaurants and bars showing pullbacks of 3.8 percent and 15.6 percent, respectively, and apparel and accessory stores down by 12.5 percent.

The numbers did spike for some areas in December, including spending on used merchandise (up 3 percent), transportation (up 42.1 percent) and utilities (up 14.8 percent).

While the state can paint a pretty vivid picture of how different industries and retail segments are faring, there are some surprises and some unknowns about what is behind the numbers.

They do not, for example, take into consideration what sales are doing to profit margins, nor do they reflect the evolution of businesses that have downsized by cutting jobs and expenses to stay healthy even while taking in less revenue.

Beauty salons, barber shops and personal appearance services come off looking quite popular in December, with a 31.7 percent year-over-year leap.

But anecdotal evidence suggests consumers are letting their hair grow a little longer, trying home perms and limiting their beauty budgets.

For Audrey's Towne Stylists salon in North Port, some customers just did not make it at all this year. "A lot of people haven't come down from the North," owner Audrey Fred said. "I've gotten a lot of calls and letters saying they can't afford it."

On a February day, Fred and an employee sat in the shop alone, no customers in the rose-colored salon chairs along the wall. Fred, who had run the operation since 1983, said that day that she would like to find a buyer who would let her stay on part-time.

Soon after, the shop closed and a "For Rent" sign showed up on the window.

Empty spaces

At Rico's, a pizza place on the North Trail near the Ringling Museum, business is down at least 20 percent and the staff has shrunk by more than half -- but those are not the only business hits Salvatore Dentici is taking these days.

In addition to a small string of Rico's restaurants, Dentici and his brothers own commercial space, with 11 units around the Rico's spot on North Trail.

"We were fully rented two years ago," Dentici said, peering out. "Now we have ... five."

That real estate once housed a mortgage company, a real estate agency and a Mexican store. "A lot of people just walked," Dentici said.

Vacancies along the Trail are striking, with clusters of leasing signs and closed-up shops punctuating large stretches of commercial space.

The Glengarry Shoppes, home to Barnes & Noble and a Best Buy, used to be flanked by two restaurants: Village Inn and Steak & Ale. Both have closed; one has been knocked down.

On a stretch of the Trail just north of Clark Road, an empty restaurant building is sandwiched between two vacant structures. Others only recently emptied, including a doomed Circuit City.

"There's probably more vacancies than I've ever seen, and it's going to take a long time to fill them," said Barry Seidel, whose name is a common sight on real estate signs along the road.

But Seidel is seeing some hope for the simple reason that his phone is ringing. It started with calls from outside the 941 area code, then from locals.

The glut of office and warehouse space tends to be the most difficult to move.

Tough as it is to lease, Seidel says sales are a bigger challenge.

Bill Clampitt has gotten a lot of interest in buying a property originally built as a Wendy's on the Trail, though a deal recently fell through. He is offering "owner financing" as an appeal to potential buyers concerned about the credit market.

Knights Inn owner Arvind Patel hoped to sell his hotel on the North Trail, but let a listing expire, figuring the market is too soft. Though he is no longer actively seeking a buyer, the listing can still be found online.

"If somebody brings in $4.4 million, they can have it," he said.

Landlords and Tenants Alike More In Favor of Short-Term Leases

From the NYT. Pretty similar to what is going on locally. Link to full article below.

Both tenants and landlords seem to be growing afraid of commitment these days. With the economic outlook murky at best, fewer of them want to tie themselves to long leases.

Tina Fineberg for The New York Times

In Manhattan, where office leases often last 10 years, there has been a noticeable uptick recently of leases lasting only one to three years. Some prominent landlords have begun playing up the availability of short-term leases in their buildings.

For example, Paramount Group is advertising two-year leases at 1633 Broadway, between 50th and 51st Streets. And the Kushner Companies sent promotional materials to brokers advertising one- and two-year leases for finished offices in 666 Fifth Avenue, a prime office tower that spans the entire blockfront of Fifth Avenue between 52nd and 53rd Streets.

In all of Manhattan, 21 percent of the office leases that were signed in the fourth quarter of 2008 were for three years or less, compared with 15 percent in the corresponding quarter a year earlier, according to Cushman & Wakefield, a real estate brokerage firm that compiles data on commercial transactions. Brokers say they expect short-term leases to become even more fashionable this year.

“There’s a lot of anxiety out there, and short-term decisions are easier to rationalize,” said David L. Hoffman Jr., a principal at Colliers ABR, a real estate services company.

Mr. Hoffman is the leasing agent for some office towers in Manhattan whose landlords have recently signed short-term renewals with existing tenants. “There were tenants with one foot out the door, who were leaving spaces that required large capital improvements,” Mr. Hoffman said. “We decided it was more cost-effective to keep them in place.”

In recent months, he has negotiated five short-term lease renewals at 360 Lexington Avenue, a 24-story, 262,000-square-foot office tower on the northwest corner of 40th Street. Three of these renewals were for two years, and two were for one year.

Brokers say that smaller tenants tend to favor short-term leases now, while large office tenants still prefer the stability of long-term leases. For example, the short-term leases that Mr. Hoffman negotiated at 360 Lexington Avenue ranged in size from 2,500 square feet to 7,300 square feet. The tenants included a law firm, a technology firm, a small financial firm and two missions to the United Nations, which is nearby.

The building is owned by AEW Capital Management, a real estate company based in Boston, which bought it for $129 million in August. “We did not forecast higher rents when we bought the building, because the Bear Stearns building was nearby, and we knew there would be a shakeout in the financial sector,” said Jeff Furber, the chief executive of AEW Capital Management, which is a subsidiary of Natixis Global Asset Management, a French investment firm. Indeed, he said, “we liked the building because it didn’t have a lot of financial firms in it.”

Mr. Furber said that tenants were driving the demand for short-term contracts and that he would be happy to sign office leases for five years or more. “But business conditions are deteriorating so rapidly,” Mr. Furber said. “Tenants are saying that they’re just not sure how much space they’ll need in a year or two, so it is hard for them to commit.”

Matthew Astrachan, an executive vice president at Cushman & Wakefield, who represents both office tenants and landlords, said that the Manhattan office market had recently become a “tenants’ market,” meaning tenants now have the upper hand in negotiations with landlords.

The vacancy rate for the entire Manhattan office market as of the end of February had risen above 9 percent. But vacancy rates are even higher in the most expensive top-notch buildings, known in the industry’s jargon as Class A office space. The vacancy rate for Class A buildings in Midtown Manhattan has climbed to 10.6 percent, according to Cushman & Wakefield.

Mr. Astrachan said that in times like these, tenants can often negotiate with landlords for concessions — like long periods of free rent and capital improvement allowances — if they are signing 5- to 10-year leases.

But tenants signing leases of one or two years cannot negotiate as many perks. “They are slightly overpaying, in order to keep their flexibility,” he said.

Charlie Malet, the executive vice president in charge of national leasing for Shorenstein, a real estate company based in San Francisco, which owns several office buildings in Manhattan, said that short-term leases were attractive for both landlords and tenants now.

“Landlords don’t want to tie up space for what they perceive to be a low rent,” he said. “And if the tenants are a little uncertain about the long-term business environment, they don’t want to lock themselves into a 10-year deal.”

Mr. Malet said that Shorenstein recently signed a one-year lease renewal with Harbor View Advisors, an investment advisory firm, at 850 Third Avenue. Shorenstein bought this 39-story, 1.2 million-square-foot office tower last summer. The price tag was around $325 million, according to Real Capital Analytics, a New York research firm that tracks sales of office buildings.

Ken Perry, the chief investment officer and director of asset management for the Swig Company, a real estate concern in San Francisco, said the company had recently signed about half a dozen short-term leases at 1411 Broadway, one of several office towers it owns in Manhattan. Swig has had a 50 percent stake in this building since it was built in 1970, and is currently a co-owner with the Blackstone Group.

“This is the first time that I can remember when both landlords and tenants want to do short-term leases,” Mr. Perry said.

He said that usually one side or the other saw an advantage in this approach, depending on which direction rents were thought to be heading. “But with all of this uncertainty in the markets, neither side wants to go long term.”

LINK

Commercial Real Estate "Black Hole"

Thought it was relevant. Seems the worst is yet to materialize. I'm a glass half-empty kind of guy, so this is no real surprise. From an agent perspective, I find myself pushing back on more listings these days as owners can't/won't keep up with the dramatically changing landscape with regard to property. Apollo Management owns the brand I work for (Coldwell Banker Commercial).

Banks warned on commercial property ‘black hole’

VIEW THE VIDEO HERE

By Henny Sender in New York

Published: March 19 2009 21:06 | Last updated: March 19 2009 21:06

A “black hole” in the US commercial property market is set to put further pressure on troubled banks, the head of leading private equity firm Apollo Management has warned.

Leon Black, founder of the firm, said the extra costs of cleaning up the US banking industry could total as much as $2,000bn, putting further strain on the economy. He said the woes of the commercial property had not yet been reflected fully on bank balance sheets.

“You have the black hole of commercial real estate and that hasn’t happened yet,” said Mr Black in a wide-ranging interview on FT.com.

“There you are sitting with $4 trillion of debt and you know not all of it’s bad but a lot of it is diminished and that really hasn’t yet been addressed.”

He warned it would be 12 to 18 months before there are lasting signs of US economic recovery.

Apollo, a firm established in 1990 that combines buy-out activity with investing in the debt of troubled companies, is in better shape than many of its competitors. It has at least $13bn to invest at a time when it is almost impossible to raise new money.

Largely because the banks are not providing financing and the capital markets are not open, Mr Black conceded that “conventional private equity right now doesn’t exist ... Conventional buy-outs are really not on the table right now”.

Mr Black warned in February that traditional buy-outs were “essentially dead for the time being” and claimed “the big public-to-privates are gone the way of the dodo”.

During the boom years, which ended abruptly in 2007, Mr Black took advantage of cheap and flexible debt to buy companies, pay his investors dividends and then sell these acquisitions as he did with Intelsat.

Now, as some of the companies he owns, such as Harrah’s Entertainment, have been hard hit by the recession, he is spending much of his time reducing their debt burdens.

“The name of the game is survival, it is too live to play another day,” said the veteran of now defunct Drexel Burnham Lambert, which pioneered the business of raising debt for less creditworthy firms.

While many private equity firms are looking at investing in debt of troubled firms – an area that Apollo has long been involved with – Mr Black is exploring the market for non-performing loans in Europe.

Copyright The Financial Times Limited 2009

Vacancy Report (2/1/09)

The Sarasota EDC numbers are in (as of 2/1) and they are as follows:

Downtown: 11.06%
University Parkway Area (includes Lakewood Ranch): 17.96%
I-75 Fruitville S to Clark: 21.32%
Venice: 22.03%
North Port: 35.13% (!!)
Suburban & South Trail: 26.65%

Area Average: 17.82%

Download Full Report Here (58kb)