Sounding Board: Boom towns

Retailers weight their next moves as the real estate markets begin to heat up. Where is the next best place to operate?

Now that the blush is off the holiday bloom it is time to face the six words that can strike fear into the hearts of the most intrepid retailers—where do we go from here?

I am not talking about the next promotion or even the outlook for the next six months. I mean where, geographically, should we be looking for growth opportunities in 2012 and beyond?

It is a daunting question given the fragile state of the economy, intensified multi-channel competition and schizophrenic consumer spending. Put them all together and a lot of growth-minded chains and independents are keeping their heads down and cash close.

Those looking around are finding fewer bargains in commercial real estate then there were in 2009 and 2010. That glimmer of light at the end of the economic tunnel—which everyone hopes is not an oncoming train—has bumped up lease rates and purchase prices in many areas. Whether this is good or bad depends which side of the negotiating table you are sitting on.

Cost aside, there is a lot of speculation about which areas hold the greatest potential for retailers.  But some interesting, if not surprising, choices were examined in a recent forecast from PricewaterhouseCoopers and the Urban Land Institute, which outlined the top 10 markets for 2012, based on demographic, economic and real estate trends.

Topping the list was Washington, D.C., which historically has outperformed every other market during a recession. Although the government is still the major employer the area has been significantly diversified by the influx of technology, communications and bio-medical industries. Consequently, home prices should recover faster than other cities and national retailers are already jockeying for a larger presence here.

Austin, Texas, named by several sources, has all the right ingredients for insulating itself from the boom/bust scenarios experienced by other cities—a strong state government, a flood of professionals drawn by the University of Texas and a growing reputation as an incubator for high-paying tech companies.

San Francisco is back near the top of the charts with housing prices showing some of the biggest nationwide gains after some of its steepest declines. It is also cited as among the best buys for commercial real estate.

New York City, despite its dependence on the financial institutions, is seeing rents increase more than any other market. And occupancy rates for apartments are the highest in the country making it an attractive area for retailers focusing on urban expansion.

Rounding out the top five is Boston with a well-educated workforce drawn from the colleges and universities and a remarkably strong housing market that only suffered modest declines during the recession.

The rest of PwC’s top 10 list are mostly on the West Coast. Seattle is bouncing back due to a newly diversified corporate base. San Jose remains strong despite competition from the tech surge in neighboring San Francisco. Los Angeles is also rebounding. In fact, the metro market is ranked No. 2 in apartment and industrial investment. San Diego, with its disgustingly perfect climate remains a big draw for high-tech and bio-tech companies as well as a steady stream of retirees.

Reports from other sources cite the same areas but some also add Baltimore, Philadelphia and Pittsburgh to list of healthy retail markets.

However, some say finding the growth markets is the easy part. The challenge is where to go once you are there.

According to several sources that look closely at retail real estate trends, retail construction has been at its lowest level in decades. Vacancy rates are dipping and competition for so-called first-tier shopping centers will intensify. This could result in double-digit increases in leases this year. Meanwhile, if you are already leasing prime space and looking for a discount for early renewal or extension, do not be surprised if owners or developers turn a deaf ear.  Only those with properties that are real dogs, like some unanchored strip centers, appear willing to deal.  Even those are few and far between depending on location.

Discounted lease rates are still to be had in some urban areas—especially those with higher unemployment. But with the big boys like Walmart and Target making their bid for the inner city, discounts are nowhere near what they were a couple of years ago.

Solutions rarely come easy. But remember this holiday wisdom from Peanuts’ creator Charles Schultz.

Lucy: “I always get a lot of stupid toys or a bicycle or clothes or something like that.”

Charlie Brown: “What is it you want?”

Lucy: “Real estate!”

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