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| February 02, 2009 |
By: Polyana da Costa |
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ot too long ago, shopping center owner and developer Joe Carosella had what most real estate investors would want: a retail center in a prime location filled with national stores. But today, that east Fort Lauderdale property sits half empty, and many of his once-reliable tenants are now bankrupt.
 Multimedia: Store closures
Bal Harbour Square suffered its latest hit after the collapse of Circuit City, which is expected to vacate the center on North Federal Highway in April. Other chains such as Linens ’n’ Things, Bombay, Lone Star Steakhouse, Pier One Kids and the Rag Shops also left empty spaces at this and other retail centers throughout the country.
As with other South Florida retail property owners, Carosella, president of the Boca Raton-based Retail Property Group, which owns about 2 million square feet of retail space in Florida, is bracing for what is expected to be a catastrophic year for retailers.
“Landlords need to be patient, understand the market and think of it in the long term,” he said.
While Carosella is trying to stay positive, the carnage is having a severe impact across South Florida as vacancies rocket, incomes plunge and owners struggle to make ends meet.
“The next few months are going to be one of the worst periods that South Florida retailers have ever experienced,” said Greta von Unruh, executive director of the Economic Development Research Institute in West Palm Beach.
Following one of the worst holiday seasons in decades, U.S. retailers are expected to close as many as 200,000 stores and 2,000 to 3,000 malls this year, according to several forecasts.
About 160,000 stores have already closed last year.
The local damage, which can already be seen through the many boarded up storefronts and vacant stores, is expected to worsen as owners struggle to find tenants to fill the swaths of empty space.
Carosella’s Fort Lauderdale retail center is one of the many that will remain partially empty for a while.
The longtime retail owner is looking at his losses as an opportunity to redevelop the property. He said he has several potential national stores interested in leasing his center, but no store is willing to commit to opening until next year, he said.
“We could get it opened sooner, but they don’t want to,” said Carosella declining to name the potential tenants. “Everything has slowed down right now. Retailers have faith the economy will pull up slowly but not until the first quarter of 2010.”
For some forecasters, a 2010 recovery of the retail market is too optimistic.
“Retail has been exhibiting weakness since the first quarter of ’08, and I expect vacancies to rise through 2011,” said Victor Calanog, director of research at REIS, a New-York based commercial real estate research company. “The general economy may be expected to begin recovering in 2010, but it will take about 12 months after that for retailers to recover, and South Florida seems to be in line with that expectation.”
Despite the vacancies at his center, Carosella says he is well-capitalized can still manage debt payments on the property. He bought Bal Harbour Square in 1997 for $2.3 million and has a $27.5 million mortgage, according to public records.
But not everyone will be able to stay afloat, especially investors who bought retail properties during the height of the market and have mortgages coming due soon.
Some lenders already have started foreclosing on retail properties throughout South Florida.
In West Palm Beach, Hillcrest Bank recently filed a foreclosure on four empty retail stores on the ground level of residential condo tower 610 Clematis. The owner, Ilia Mogilevsky, bought the stores from BAP development in 2006 for $2.7 million, but has not been able to find any tenants.
David Knott, a senior commercial associate at Merin Hunter Codman, is the leasing agent for the stores.
He said they have attracted some interest from various retailers, but no business has been willing to commit to a lease.
Knott declined to comment on the foreclosure, but said he expects to see other retail properties going into foreclosure as more retailers close their doors.
Jeff Ross, senior vice president of leasing at Urban Retail Properties’s Boca Raton office, has similar expectations. But he thinks many of the retail properties that go into foreclosure will end up being sold at deep discounts before being taken by the bank.
Urban Retail was appointed as the receiver on two retail properties outside of Florida that are in foreclosure, he said. The properties are being marketed for sale, but offers have come in for only about 65 percent of what they are worth.
“There is still a lot of private money on the side,” he said. “I think many of the stores that end up in foreclosure will be repurchased as they get taken out.”
But the pool of buyers also has been shrinking.
The publicly traded Simon Property Group, one of the largest shopping center owners in the U.S., has already announced the suspension of all its acquisitions for 2009, Calanog said.
“And it’s funny because they should be in a position to acquire some attractive shopping malls,” Calanog said. “They are very well-capitalized. You would think they would be sweeping in and taking advantage of these deals, but they are not.”
In South Florida, Simon has at least two struggling malls. One of them is the Palm Beach Mall, which is about half vacant after it lost two of its largest tenants, Dillard’s and Macy’s, which has a going out of business sale and is expected to close soon. The other is the Boynton Beach Mall, which has several vacant storefronts.
A Simon’s spokesman declined to disclose the company’s vacancy rate in South Florida.
Keeping tenants
Faced with historic high vacancies, retail landlords are doing everything they can to keep their tenants in business, even if that means reducing the rent or paying for maintenance expenses normally paid by tenants.
Ross, of Urban Retail, said his company has been able to avoid losing tenants by working out short-term deals.
“We have a file about an inch thick of rent relief requests,” he said.
Ross said each case is looked at individually, and the company has given six- to 12-month rent reductions to some tenants.
But like many others in the retail industry, Ross doesn’t expect the economy to recover by then.
“We are leaving it to 12 months right now, and after that, we will have a dialogue with the tenants and see where we stand,” he said.
When retail landlords lose a tenant, they not only lose the monthly income from the rent, but they also incur extra expenses because they have to pay their share of common area expenses such as maintenance costs and insurance.
The extra expense can translate to as much as 25 percent of the base rent, Ross said. In many lease agreements, those maintenance costs can be passed on to the remaining tenants, but in this market, most landlords are not throwing the added burden on their tenants fearing that they, too, may end up closing.
“Given this economy, many landlords have elected to take over the maintenance expenses,” Ross said.
But while landlords are making every effort to minimize the impact store closures may have on their neighboring tenants, there is only so much they can do. When an anchor tenant closes, the neighboring stores get hurt because the traffic of shoppers decreases.
At Bal Harbour Square in Fort Lauderdale, one of the few stores left is a Men’s Warehouse that sits near the soon-to-close Circuit City, which is shuttering 567 stores nationwide.
Hank Monti, a salesman at the Men’s Warehouse said he expects sales to decrease by 25 to 30 percent at his store, once Circuit City leaves.
“We are very worried about it,” he said. “I’ve never seen anything like this before.”
Two South Florida areas that are hurting the most are Boynton Beach and Palm Beach Gardens, which have a lot of new retail shops that are mostly vacant.
In Boynton Beach, the first phase of the recently completed 117,000-square-foot Quantum Town Center sits mostly vacant.
Bobby Jones, marketing coordinator for the project by California-based Olen Properties Corp,, said the center is about 25 percent leased, and the first three tenants moved in this week.
Back in the days when the economy was booming, he said, a project like Quantum would have been 50 percent pre-leased before completion.
“The days are over when you sit waiting for tenants to come to you,” he said. “You are back to knocking on doors. You have to come out and really market your product.”
Jones said the center continues to attract interest from potential tenants, but demand has slowed, and rental rates are down about 30 percent compared with last year.
From rental rates and property values, to jobs and sales taxes, each store closure has a domino effect, said von Unruh of the Economic Development Research Institute.
In the last quarter of 2008, South Florida employed about 32,000 fewer workers in the retail industry than it did in that same period in 2007, when it employed about 622,000 people. Unruh expects thousands more jobs to be lost in the retail sector this year.
Just in the last week, Home Depot announced it was closing 34 Expo Design centers, including five in South Florida, and laying off 7,000 workers nationwide. The once unstoppable Starbucks also announced it is closing another 300 stores, in addition to the 600 store closures announced last year. It also is slashing another 6,700 jobs.
“These store closures have a severe impact on everything, and I think we are only starting to see the beginning of it,” she said.
Polyana da Costa can be reached at (561) 820-2065.
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