2013 Real Estate Market Review

2013 HAMPTON ROADS RETAIL REAL ESTATE MARKET REVIEW Author David Machupa Cushman & Wakefi eld | THALHIMER Survey Collection Kyllie Brinkley Bullion E.V. Williams Center for Real Estate and Economic Development Old Dominion University Data Analysis/ David Chapman, Ph.D. Layout Old Dominion University Financial The E. V. Williams Center for Real Estate and Economic Support Development (CREED) functions and reports are funded by donations from the CREED IPAC and Council Advisory Boards, organizations, and individuals. Disclosure The data used for this report are deemed reliable; however, neither Old Dominion University, the E.V. Williams Center for Real Estate and Economic Development, nor sponsoring companies and/or individuals makes any representation or warranty as to its accuracy. 2013 RETAIL 13 2013 RETAIL General Overview his report analyzes the 2012 retail real estate con- ditions within the Virginia Beach-Norfolk-New- port News, Virginia Metropolitan Statistical Area (MSA) which is commonly referred to as Hampton Roads. The report examines supply, vacancy, construction, absorption, and rent data to provide a comparison of data for the specifi c submarkets and product types located within the Southside and Peninsula regions of the Hampton Roads MSA. Southside properties surveyed for the purpose of this report included those located in the cities of Chesapeake, Norfolk, Portsmouth, Smithfi eld, Suffolk and Virginia Beach. Peninsula properties surveyed are located in the cities of Gloucester, Hampton, Newport News, Poquoson, Williamsburg, and York County. This survey is recognized as the most comprehensive analysis of retail real estate trends in the Hampton Roads MSA. The report includes information on all retail property types including regional malls, freestanding buildings and strip centers of various classifi cations. The scope of the report also includes a summary of new retail construction activity, an analysis of absorption, and a review of selected retail investment sales that have occurred in the region in 2012. METHODOLOGY This survey gathered information about strip shopping centers and regional malls located in the Hampton Roads MSA that were generally 30,000 square feet in size or larger. Additionally, information on retail-oriented freestanding buildings at least 23,000 square feet and freestanding buildings that contained furniture stores, discounters, grocery stores or category killer retailers that met the established size criteria were included in the survey. Automotive uses and buildings containing “downtown storefronts” were not included. Although available retail space in many submarkets (e.g. Ghent) is best described as a collection of small specialty shops, storefronts or freestanding buildings, practical limitations dictated that the focus of the survey be on larger product types. The survey data was collected between October 2012 and January 2013. Questionnaires were mailed to owners, leasing agents and property managers responsible for retail properties meeting the selection criteria. Direct contact was utilized as a follow-up to the mailing to encourage participation. Information on square footage for freestanding buildings was obtained from building owners, tax records, store managers and retail real estate representatives. Sales information was obtained from property owners, real estate agents, appraisers and real estate assessors. 14 2013 Hampton Roads Real Estate Market Review DEFINITIONS OF TERMS Asking Rates: The market rate per square foot of a retail property (excluding freestanding buildings and malls), exclusive of additional rents that may be paid under a triple net lease. Interpretation of average retail rates in different product types and submarkets should be viewed cautiously given the tremendous variability in rates for like products and for properties located within the same submarket. Factors such as visibility, co-tenancy and accessibility are some of the many sources of variation in market rates which should be considered. Big Boxes: Contiguous retail space that is at least 23,000 square feet and located in any one of the identifi ed product types. Retailers occupying big boxes include, but are not limited to, the following: category killers, specialty stores, discounters, furniture stores, grocery stores and theaters. Bowling alleys, automotive uses, roller rinks and ice-skating rinks were not included. CAM: Common Area Maintenance. Product Types: Properties were classifi ed according to one of the following nine retail product types. The Inter- national Council of Shopping Centers defi ned the fi rst six categories. Three additional categories were included to accurately categorize the remaining properties. Neighborhood Center 30,000 to 150,000 square feet; supermarket anchored Community Center 100,000 to 350,000 square feet; discount department store, supermarket or drug store anchored Fashion/Specialty Center 80,000 to 250,000 square feet; fashion anchored Power Center 250,000 to 600,000 square feet; category killer, home improvement and discount department store anchored Theme Festival Center 80,000 to 250,000 square feet; restaurants, entertainment anchored Outlet Center 50,000 to 400,000 square feet; manufacturer’s outlet store anchored Freestanding Individual building not considered a shopping center Mall Shopping center with area designed for pedestrian use only Other Any center that does not fi t into a typical category 2013 RETAIL Regional Mall Node: Submarket anchored by regional mall. Small Shop: In-line retail space usually less than 10,000 square feet located in a multi-tenanted shopping center. Submarkets: Hampton Roads is divided into 35 retail submarkets (25 Southside submarkets and 10 Peninsula submarkets) which refl ected general concentrations, pockets or corridors of retail product type. Geographical boundaries of the retail submarkets were infl uenced by density of existing retail product, physical or geographical obstacles, existing transportation networks, municipal boundaries, population concentrations and retailers’ per- ceptions of the MSA. Final determination of specifi c boundaries of each submarket was made by a subcommittee of retail real estate professionals who are actively involved in the MSA. Also highlighted were specifi c submarkets that are anchored by regional malls. A map which identifi es the general location of each submarket is included in the centerfold of this report. Triple Net Lease: Type of lease under which a tenant pays its pro-rata share of real estate taxes, insurance and common area maintenance. 15 2013 RETAIL YEAR IN REVIEW The Hampton Roads market is in a gradual recovery. At the end of 2011 we saw economic indicators and trends that lead us to believe the gradual recovery would continue, and continue it did in 2012. On a national level, the retail market improved, and it also did, here in Hampton Roads. There was less culling of the herd amongst retailers this past year and, as such, less occupied retail came back to market. The fi nancing market is making its way back as well. While not as robust as at the peak of the market, fi nancing is available and lenders are actively looking for opportunities. A disconnect still remains on product valuation between buyers, sellers and lenders of retail centers and, as such, we did not see a great deal of investment sales this past year. With a decreasing vacancy rate, we witnessed an increase in the average asking rents across Hampton Roads and renewed tenant interest in the market. We ended 2011 cautiously optimistic as we moved in 2012, and do so again entering 2013. Fortunately, 2012 brought increased activity from various mid-size and big box users. WalMart was under construction with a new Super Center in Newport News along with several of the smaller Neighborhood Market concepts. Bally’s went bankrupt and their locations were backfi lled; Harris Teeter opened in Portsmouth and signed a lease and announced a new Wards Corner location in Norfolk; Kroger became aggressive and purchased the former Super KMart location on Holland Road in Virginia Beach and is currently under construction with their 124,000 square foot concept. Additionally, Kroger is under contract in various cities across Hampton Roads, including Portsmouth and Suffolk. Target opened on the backside of Pembroke Mall and was a catalyst for Off Broadway to join them there; Hampton Roads welcomed its fi rst Whole Foods in the Hilltop area of Virginia Beach; Dave and Busters announced at Lynnhaven Mall; Urban Outfi tters opened in Downtown Norfolk; and 7-11 made a push by acquiring existing gas stations and rebranding. Cookout entered the market with locations in Newport News, Norfolk, and Portsmouth, and is under contract in Chesapeake. Starbucks added three new locations to the market and continues to expand and develop sites. Settler’s Market in Williamsburg is again pushing dirt for the mid box retailers that expressed an interest when the project initially started. This activity speaks well regarding the direction of the market. There has been a bit of downside concerning retailers as some continue to struggle on a national level, and some of the Hampton Roads locations are impacted. Sears closed the Military Highway location in 2012; Blockbuster announced the closing of four out of fi ve remaining stores in Hampton Roads; but, on a larger scale, there is concern about Sears and Kmart on a national level, Best Buy continues to struggle as more and more electronics sales are lost to the internet, JCPenney miscalculated with a new pricing policy and chased customers away from an already struggling concept. Barnes and Noble continues to be impacted by electronic books and the offi ce product sector as a whole is downsizing stores. These retailers may impact the market due to their inability to adapt to the new retail reality. Hampton Roads is improving and at a pace that we realistically expected. One concern for the retail market is how the military will be impacted by the new budget cutbacks and how those cutbacks will be felt by the retailers. Retailers have fl ourished in the market because of a stable military presence and Hampton Roads is home to almost 100,000 military personnel.

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