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Retailers ready to scrape by

Business leaders look beyond a cooling off period and see growth ahead. They just have to learn to cope with the present.

By MARK ALBRIGHT
Published August 22, 2006


KISSIMMEE - After seven years of boom-time, Florida's vast retail real estate industry is bracing itself for a breather.

Retailing usually follows housing's downward spiral when the economy goes soft. Right now home sales are off, and prices are falling. Homeowners from northern states are staying put, confirmed by the recent decline in h skyrocketing faster than many of their tenants can afford to pay in higher rent.

"It's getting iffy out there," said Craig Sher, president and chief executive officer of Sembler, a St. Petersburg developer that has been one of the nation's 10 most active shopping center builders.

Such was the troubling undercurrent as more than 4,500 retail developers and retailers gathered Monday for the annual International Council of Shopping Centers Florida dealmaking session here.

A model in red, white and blue hot pants and an Uncle Sam hat passed out form letters for developers to send state legislators and Congress addressing what several speakers called "the insurance crisis." Several panel discussions outlined how developers are grappling with the fallout of soaring costs. Yet nobody could report any falloff in retailers' interest in building a bigger presence in a state forecast to add 10-million residents in 25 years.

"That's like the entire state of Illinois moving to Florida," said Whitney Knoll, executive vice president of Trammel Crow Co. "The next couple of years may get rocky, but Florida remains the place where retail real estate investors want to be for the long term."

Indeed, there were plenty of tidbits indicating the marketplace was still robust. Aldi, a German-owned limited assortment grocer similar to Save-A-Lot, is sniffing out its first deals in Florida. Home Depot Inc. disclosed it expects to sign a lot of branch office and warehouse leases for its dramatically expanding construction supply business in Florida. Pollo Tropical, a Miami flame-grilled-chicken chain, is returning to the Tampa Bay area this year after pulling out a decade ago.

The fact is, whatever slowdown develops is not apparent in current retail demand.

With a vacancy rate of 6.4 percent, the Tampa Bay area retail market is considered almost fully leased. Rents rose about 3 percent this year. With such newcomer chains as Kohl's, Dick's Sporting Goods and BJ's Warehouse Club moving aggressively into the market, 39 shopping centers are in a development pipeline that would add 3.5-million square feet to the current inventory of 35.2-million.

How fast all that new space - equal to three regional malls - actually comes online is the center of the debate.

Developers say signs are evident in negotiations that the game is changing. Retailers are focusing on the best sites. They are trying to cap their exposure to future big insurance premium increases in leases. Panda Express, a California restaurant chain that had been moving into free-standing stores that cost $1.4-million each, is shaving costs by switching to cheaper shopping center space if it can fit in a drive-through window.

In addition to rising interest rates, retail construction costs jumped 40 percent over the past two years. And many shopping center owners are now in technical default of their mortgages because they cannot get windstorm insurance coverage.

Some big chains such as Winn-Dixie and Publix Super Markets elected to become self-insured against wind damage. The state recently decided to set up a joint underwriting firm of last resort to cover small businesses that cannot get coverage. But many developers, which have been hit with doubled, tripled and quintupled premiums with less coverage, are too big to qualify.

"The days of low-cost windstorm coverage are over in Florida," said Lee Arnold, chief executive of Colliers Arnold, a Clearwater real estate firm that represents about 70 retailers. "The dynamics are in place for a dramatic change in the way we do business. The state has to step in and so does the federal government."

And shopping centers have other reasons to worry: Studies by ICSC show that consumer debt and soaring gas prices are causing people to rethink their discretionary spending.

"We're starting to see it now," said Seth Layton, executive vice president for Florida with Kimco Realty, one of the state's biggest retail landlords.

Mark Albright can be reached at 727 893-8252 or albright@sptimes.com.

[Last modified August 21, 2006, 23:47:24]


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