As the number of empty storefronts continues to grow across the U.S., signs are pointing to a slowdown for the national retail-property market. Vacancy rates in community shopping centers increased in 30 of 77 U.S. metro areas last year, compared with 24 in 2015 and 19 in 2014, according to data from real estate researcher Reis Inc. Rents, which usually increase roughly at the rate of inflation in healthy markets, decreased in two metro areas for the full year. In the fourth quarter, rents fell in 15 metro areas from the third quarter.
Despite continued discussion about the board’s role in providing tax abatements, known as payments in lieu of taxes, outside of Downtown Memphis, The Center City Revenue Finance Corp. approved a a partial 15-year tax abatement for a $43 million apartment and retail project on a prominent but blighted Midtown. According to The Commercial Appeal, redevelopment of the southwest corner of Union and McLean would produce a net increase of $1.7 million in city and county property taxes during the term while saving developers about $10.5 million. But Downtown Memphis Commission officials were quick to point out that the tax savings was a “fictional/moot number” because the "transformative, high-impact" project wouldn’t happen without the incentive, and it was a big enough project to justify granting an incentive outside the core area of Downtown.
Macy's will close 35 to 40 underperforming stores, around 5% of its total locations, in response to shifting shopper habits and investor demands to make better use of its real estate. While the specific stores have yet to identified, they are expected to be shuttered in early 2016. Annual sales volume at the stores is expected to be about $300 million, which would represent about 1 percent of total Macy's sales, the company said.
Walgreens, CVS, and other big drugstore chains have been challenging property tax assessments in courts around the country for the past decade, with little national notice. Kentucky tax officials, in particular, have been battling Walgreens over property assessments since 2012. The drugstores argue that the rent they pay their commercial landlords doesn’t accurately reflect property values, and when successful, get their tax bills slashed. The onslaught of appeals has spiked controversy, and according to Bloomberg Business, Kentucky assessors are not only concerned about the potential cost of hundreds of millions of dollars if they start losing the tax assessments on all of these leases, but they worry other national retailers will follow suit, further threatening the budgets of already struggling school districts. Last month, a Kentucky circuit court judge ruled in favor of Fayette County over Walgreens, concluding the latest skirmish in a long-running battle between national drugstore chains and tax assessors.
A Pennsylvania school district is creating significant tension between itself and the Franklin County, Pennsylvania Economic Development Department. In an effort to generate more tax revenue from commercial and industrial properties, the Chambersburg Area School District (CASD) is pushing a reverse tax assessment initiative, in which the district has a consultant that identifies commercial properties as being underassessed. With school board approval, the district pursues an appeal to reassess a property's value at an increased amount -- going back to the point the appeal is filed, and through and beyond the time a settlement is reached or the appeal is won. Specifically, the CASD is targeting large warehouse properties occupied by major corporations such as Sears and Target. Not only is the school district creating a risk of losing large commercial tenants and the jobs they provide, there seems to be little concern about the impact it would have on the economic stability of this mostly rural central Pennsylvania county. Paradigm Tax Group is available to assist taxpayers effected by this trend of reverse tax appeals.
The performance gap between strong class-B malls and struggling ones continues to grow by the day. According to the National Real Estate Investor, while malls with little competition are experiencing increasing market rents, class-B malls in larger markets that are competing against other properties are losing tenants and struggling to stay afloat. Weak performance of anchor tenants such as Sears and J.C. Penney has already challenged occupancies and rental rates at many class-B malls, especially. Another challenge facing the sector is that in addition to competing with other malls to retain tenants, mall owners are also competing against open-air centers, who have been receiving greater interest in their properties over traditional mall tenants. Lastly, investor interest is low for class-B properties, as many traditional investors are shying away from the sector.
As sales continue to take a dive, Office Depot recently announced plans to close 400 U.S. stores by 2016. According to an article from the Wall Street Journal, Office Depot's first-quarter sales declined 2.9% to $4.35 billion, compared with pro forma revenue a year earlier generated by the merger with OfficeMax. Office Depot posted a loss of $109 million, compared with a loss of $7 million a year earlier. The closures stem from the overlap created by last year's merger, the company said. The retailer currently has 1,900 stores in the U.S., and said that it was still determining which stores would go on the chopping block, but 150 closures are pegged for this year. Rival office-supplies retailer Staples Inc. previously detailed plans to close as many as 225 of its stores by the end of next year. Office suppliers are cutting back floor space as consumers shift their spending online and shop less for certain kinds of technology.
By Jerry Heaton, Senior Managing Consultant, Dallas
Perhaps the hardest hit sector by the great recession, retail may finally be seeing a consistent strengthening in fundamentals. According to the National Real Estate Investor, during the first quarter of 2013, the average vacancy rate at all neighborhood and community shopping centers declined by 30 basis points compared to the same period in 2012, to 10.6%. Over that same time frame, effective rents rose 0.7% to $19.13 per square foot.
Rumblings coming out of ICSC's RECon event in Las Vegas, in which Paradigm Tax Group is in attendance, is that new retail development is no longer a pipe-dream, but a tangible possibility as industry players being drawing up new projects. According to the National Real Estate Investor, some companies, primarily publicly-traded REITs, might already be close to putting shovels in the ground as they sign up expanding retailers to go into their new centers.