Taking on the Retail-Space Challenge

//May 7, 2007//

Taking on the Retail-Space Challenge

//May 7, 2007//

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Businesses and brokers face increasing competition in a dynamic sectorHOBOKEN – With the highest per-capita income and population density in the nation, New Jersey has become a magnet for retailers and retail brokers seeking to expand their presence in the state. But both retailers and brokerage firms have been beset with challenges as the state’s retail market becomes increasingly competitive.

“There is certainly a desire among the leading retailers in the nation to either establish or expand their presence in New Jersey,” says Gary Saulson, director of corporate real estate for Pittsburgh-based PNC Financial Services Group, which has 300 branch locations in New Jersey. PNC opened 20 new branches in the state last year and expects to open more branches at the same pace in 2007 and 2008.

New Jersey had an overall retail vacancy rate last year of 3.95 percent for more than 72 million square feet of retail space, according to The Goldstein Group, a Glen Rock-based retail real estate brokerage firm. This rate, which has remained about level during the past three years, shows a tighter retail market for New Jersey when compared with other states, says Chuck Lanyard, principal and director of brokerage services at the firm. “Other regions in the country have considerably higher retail vacancy rates—in the 7 to 9 percent range,” he says.

“For every store that goes out of business, there’s stores that are just waiting to get into the marketplace to fill them,” says Ronald Fotiu, vice president of NAI James E. Hanson, a commercial real estate brokerage firm in Hackensack. The retail absorption rate, which is the length of time it takes for a vacated property to be leased, can be as quickly as 30 to 60 days in the state, according to Fotiu. He says that in the mid-1990s, the absorption rate for retail was about six months. The office market, meanwhile, has a double-digit vacancy rate and an absorption rate of at least three to nine months, he says.

New Jersey’s wealthy communities make the state a highly sought-after location for retailers. “There’s a lot of money for retailers to be made in the suburbs,” says James Aug, senior vice president of CB Richard Ellis (CBRE) in Hoboken, where the commercial real estate firm opened its first retail office in the state in March. Retailers can earn higher profit margins in New Jersey than in Manhattan, Aug says, because they can pay lower rents here and New Jersey locations often generate higher sales volumes.

A shortage of supply has resulted in retailers vying for the same sites. “It’s been a very competitive environment,” says Saulson. “Not only are we competing with other financial institutions for sites, but we’re competing against a number of other retailers.” Such competition has driven up real estate prices, which include construction costs and building rents, by as much as 40 to 50 percent in the past two years.

“I would definitely say that New Jersey is one of the tougher spots for availability,” concurs Ron Hornbaker, senior vice president of sales and operations at Golf Galaxy, a Minneapolis-based golf equipment retailer that opened two stores in New Jersey last year, with plans for three or four additional locations in the state. Golf Galaxy has 75 locations nationwide and plans to add 250 more stores at a rate of 18 to 20 openings per year.

Hornbaker says the timing for store openings largely depends on finding a site with high visibility and 15,000 to 16,000 square feet of space. But many retailers are looking for the same type of real estate. “It’s kind of a horse race as to who can get to those sites first,” he says. “Many times, you find out about a site before it goes up for lease.”

The competition among real estate companies has also heated up in the state, as brokerages expand to accommodate the needs of growing retailers. “Not only has the market become more competitive for retailers, it’s become more competitive for brokers as well,” says Aug.

The brokerage has hired eight new retail executives in the past nine months, three of whom will be based in the new Hoboken retail office, says Alison Lewis, senior managing director of CB Richard Ellis’ New York Tri-State Retail Services Group in New York City. Lewis expects to add more mid-level retail brokers, associates and researchers to the firm’s five New Jersey offices by the end of the year; the retail office alone is expected to be staffed with a dozen retail brokers within 12 months.

“For the last two years, people have said that we really need to expand into the suburbs,” says Lewis. “We were really missing an opportunity here.” With the expansion, she notes, the firm will now have retail brokers covering the entire state. “We anticipate to get even more business because of our reach,” she says.

At the same time, she says, the retail market is more difficult to navigate than the office market. “There’s so many different forms of retail,” from strip centers to malls to mixed-use developments, she says. Office buildings, by contrast, are easier to track because they are listed on databases such as Costar and have a more uniform payment structure, whereas retail rents can be paid on a per-square-foot basis, on a percentage basis or as a flat fee, Lewis says.

Other firms are building up their retail teams and services to stay competitive. “There are brokerage firms that were not in our marketplace that have recently come aboard,” says Fotiu, naming The Staubach Co., whose New Jersey operations are based in Murray Hill, and Grubb & Ellis, which has offices in Fairfield and Edison, as new rivals for retail clients in the northern New Jersey market.

NAI James E. Hanson has hired a number of new retail brokers in the state, as well as five or six more retail support staffers to compile consumer-trend reports, aerial photos of sites, demographic studies and maps that indicate where competitors are located within a certain area. Fotiu says his firm and its rivals are also attending more shopping-center conventions to better reach retailers.

Aug says New Jersey’s highly competitive retail market offers numerous opportunities for brokerage firms. “Retail leasing is a growth vehicle for pretty much any big company these days,” he says. Large real estate services firms like CB Richard Ellis “have always specialized in office leasing … [but] they have not tapped the retail brokerage market to its fullest.”

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