Monday, August 23, 2010

New Retail Activity - A Sign of Improving Economy or Anomaly?

Recently we have seen a mini-wave of new construction in the retail sector over and above the Walmart's and Winco's of the world who, with lots of cash, are funding their own re-positioning in the marketplace. We are talking small to medium-sized shopping centers, with grocery store anchors and supporting retail buildings.

Developers currently engaged in retail construction are convinced the demand is there, and interestingly enough, are not having a hard time finding tenants. There seems to be a variety of new national chains and local small businesses eager to take advantage of new digs, especially if they are located in trendy areas. The difficulty continues to be in the financing arena. Lower appraisals and tougher lending standards continue to plague developers in their efforts to get projects off the ground. A much higher equity position means the developer has to be in the project for the long run, eliminating those that traditionally build and sell.

It is our hope that this recent up-tick will be a sign of things to come. Similar to Wall Street, someone has to break the ice, and no one wants to be the last one in. Downturns in the past have shown that once the momentum shifts to forward, that others jump on board to take advantage of the lower land and construction costs. And once the developers understand that their return is on a longer cycle, they will find the means to work through the financing issues. Finally, as the banks confidence in private development returns, lending practices might loosen up. It just takes time for folks to adjust to a new environment and new rules. But it is a fact that if developers are not building, they are not making any money. So there is plenty of motivation to get this part of the economy back up and running again.

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