11 QUESTIONS AND ANSWERS ON THE LONG ISLAND RETAIL MARKET
The Long Island retail market has grown significantly over the past few years, and is one of Kimco’s strongest markets. I talked in depth about this recently as a panelist for ICSC’s “Long Island Retail from All Sides" program. The event provided a snapshot into Long Island’s current and future retail market from the perspectives of several industry professionals.
My fellow panelists included LeAnne Wheeler, Director of Real Estate for Aldi Supermarkets; Mark Walsh, Director for Select Investment Realty Advisers; and Jeremy Isaacs, Partner of Ripco Real Estate. Eric Rubenstein, Chair of the Real Estate Department for Ruskin Moscou Faltischek, moderated the discussion.
Eric Rubenstein asked several different questions about the Long Island retail market. I wanted to share some of those questions, along with my thoughts on where I see the Long Island retail market heading in the coming months, as well as some news on Kimco’s Long Island portfolio.
1. What makes Long Island so attractive for retailers and developers? How do you view Long Island as a retail market versus other areas in the region and country?
The Long Island market is well-positioned for strong retail performance. Long Island is a vibrant and dense market of 8 million people, most of whom have a relatively high level of disposable income. As I mentioned earlier, it is one of Kimco’s strongest markets, and we currently own 37 centers on the island, comprising about 3.6 million square feet of gross leasable area.
With no significant new retail development in the pipeline, Long Island is under-retailed compared to the rest of the country (about 47 square feet per capita in the U.S. versus 25 square feet per capita on Long Island). Limited supply insulates the retail rental market and enables us to keep our centers fully leased with healthy rents.
In addition, the investment sale market in Long Island is extremely tight, with cap rates trending back towards historic lows. High-quality neighborhood centers are seeing cap rates dip below 6 percent, with some assets fetching in the 5’s.
2. In the recent past, some retail facilities have been repositioned into industrial, office, or other uses on Long Island. Is that a trend you see continuing?
While landlords will continue to evaluate the tenant mix for their centers, I don’t see the trend of retail being converted to non-retail happening on a large scale. Rather, I predict the standard size of certain retail stores will shrink, and more non-retail uses will be added to tenant mixes. The most popular non-retail use these days is stemming from the health/medical field, mostly consisting of health clubs, health and wellness centers, and urgent care centers.
3. Discounters and grocery stores which sell staple items have generally been viewed as performing better than other retail sectors. Do you see that continuing and are there any other sectors in the retail industry behaving this way?
Necessity retail -- grocery stores and discounters -- will also always be in demand and continue to thrive. Even if times are bad, consumers will still need to feed their families and pets. Consumers might not spend as much in a recession, but they don’t stop shopping for their everyday needs -- instead they’ll look for less expensive options and alternatives.
Specialty grocery stores, such as Aldi, Trader Joe’s, The Fresh Market, and Whole Foods Market, are performing well on Long Island. As for wholesalers, everyone likes a discount. While lower-income families might need the discount, many upper-income families also don’t want to pay full price for their goods. Other sectors that are performing exceptionally well include health clubs and sporting goods stores, such as Sports Authority and Dick’s Sporting Goods.
4. As a shopping center owner, presumably you are being approached by tenants in distress, and tenants who claim to be in distress, asking for rent reduction and other relief. Have those requests been decreasing?
We were discussing rent reductions and deferrals almost on a daily basis with many of our existing tenants in 2009. Those discussions diminished by the end of 2010 and into 2011. I attribute this to an improving economy.
Unfortunately, some tenants did not make it through the recession, but many who did came out stronger. For Kimco, this placed our portfolio in a better operating position. Weaker tenants were purged and replaced with new, exciting tenants that are drawing more traffic to our centers and adding value to our assets.
5. What type of due diligence do you perform in order to distinguish tenants in need and those who are trying to take advantage of the general economic climate?
A few years ago, most tenants were calling landlords to try and obtain rent reductions not because they needed it, but because “everyone else was doing it.” We requested profit and loss statements from each tenant, and carefully reviewed the data to skim out those tenants who were in need of a rent reduction. Many times we found that the operator had the ability to cut back in other areas, well before the rent.
6. Where do you see Internet sales going and what is the effect on your business? Will the proposed imposition of sales tax on Internet sales affect decision-making?
It’s no secret that e-commerce and online shopping will continue to increase nationwide. But there are several silver linings from this trend for retailers and landlords. First, there are only so many types of products a consumer can buy online, which ties back to Kimco’s strong position on necessity retail.
Secondly, the passing of a possible Internet sales tax will help to level the playing field.
Third, many consumers are still impulse shoppers. If there is no discernible price advantage to buying something online, many consumers find it easier to pick it up in-store, so they can own it immediately.
And finally, some retailers are starting to meld their online and in-store shopping experiences to combat showrooming and drive more customers to the stores. For example, hhgregg reported in Q1 that nearly two-thirds of its online orders were “buy online, pickup in store.” This is a promising sign that the online alternative to bricks and mortar is not as dire as some believe. In many instances, retailers have reported that customers who shop via tablet or mobile device spend more time shopping and buy more than the average customer.
7. The Kimco KEYS program in California offers business advice, free rent, and other benefits to smaller tenants. Is that program successful and will it be rolled out in Long Island?
The Kimco KEYS program launched on the West Coast in April. We are seeing retailer interest, and are partnering with a number of educational facilities, business development groups, and micro lenders to help first-time entrepreneurs navigate the crucial early years of their businesses. Once we complete the pilot program, we will evaluate our results and determine how to expand the program to other parts of the country.
In addition to Kimco KEYS, we have also developed another program available in Long Island to assist smaller tenants, named FastTrack Franchise. We have taken a new approach on how to find and lease franchise operations.
Historically, someone will sign up as a franchisor for a specific territory and then seek a location. Kimco is approaching this process from the other side, and is working with franchisors to pre-approve certain locations across our Northeast and Mid-Atlantic portfolio and co-advertise with them.
So, an interested franchisee will see that a specific chain is approved for a site and call to open that shop. It is a win-win for us and the franchisor. The franchisor gets a warm lead and we will hopefully obtain a tenant.
8. Will the presidential election impact the retail market?
I think most retailers, especially small businesses, will be in a holding pattern until after the presidential election. It’s difficult for small business owners to make significant capital-intensive decisions if they do not know what will happen with taxes and health care in 2013.
9. What are the best geographical areas for retail expansion?
The best areas to expand depend on the retailer’s customer and business goals. However, in general, retailers should follow population density and growth trends, and target markets that they have not previously tapped. Many retailers have recently begun to target the New York metro area due to a decline in rental rates, which is making the area more affordable. Some of these retailers include Aldi, Harbor Freight, LA Fitness, and Chick-fil-A.
10. Is Kimco on course to dispose of their non-strategic assets?
Yes, Kimco is on track with disposing non-strategic assets. To date, we have disposed of 63 non-strategic properties comprising 5.3 million square feet for a gross amount of approximately $365 million, which is in line with our timing and expectations. We are using the proceeds to invest in higher quality, core assets in our major markets.
11. What activity is Kimco experiencing on Long Island?
Our centers’ occupancy rates on Long Island are approximately 97 percent, close to a historic high. Leasing and acquisitions continue to be our main focus, in addition to other projects, including renovations and increasing operational efficiencies on a site-by-site basis. Our occupancy rates have remained stable over the past year, and we have seen a significant decrease in lease turnovers. All of our vacated Linens ‘n Things and Borders on Long Island have been re-leased.
In the past 18 months, Kimco has signed 28 new leases on Long Island, at an average 9 percent positive spread over the prior lease rate. Recent leases include an LA Fitness, Harbor Freight Tools, Toys”R”Us/Babies”R”US , Marshalls and several other national apparel tenants. We’re also filling our smaller shop spaces with such tenants as Moe’s; Weight Watchers; AT&T; local frozen yogurt shops; and fast-casual restaurant chains.
Kimco has been actively pursuing new acquisitions throughout Long Island, with our last two purchases including Independence Plaza in Selden and Turnpike Plaza in Huntington in 2011. At Turnpike Plaza, we filled the vacant Waldbaum’s space with a Best Yet Market, a 17-store chain, and we are undergoing renovations at the rest of the center. Kimco is also planning renovations to Market at Bay Shore, Manhasset Center, and three locations on Staten Island (Forest Avenue Shopping Center, Hylan Plaza, and Greenridge Plaza).
All in all, these factors show promising signs for the Long Island retail market, and we’re confident our continued focus in the area will generate strong returns for our investors. If you attended the panel, feel free to share your observations and insight in the comments. If you didn’t make it, what’s your take on the Long Island retail market?