The Tide Has Turned

Wednesday, May 26, 2010
Written by Ryan Pécot

Optimism that the worst is behind us is evident in the retail real estate market.

Although this market really didn't get beat up that badly, it's already looking as if Acadiana's retail real estate market is picking up steam - and looking to gain solid momentum through the second half of the year. It's welcome news for those of us in real estate, and apparently we aren't the only ones taking notice. In mid-May online financial magazine named Lafayette one of 20 cities "surviving the recession" and creating new opportunities for job growth. While the deals here never came to the screeching halt like they did in other areas, it was much more difficult getting the blue ink to a lease or purchase agreement. There was too much uncertainty, but optimism is back on track.

Now that most of the distressed landlords throughout America have practically given away their vacant spaces to have just enough cash flow to prevent the lenders from taking them back, the sweetheart deals are done - and it is time to get back to the fundamentals. Sure there is still some low hanging fruit out there for retailers to go after to lock in long-term low occupancy costs, but they are much more limited than just six to 12 months ago. By this point in the cycle, most property owners have swallowed their Tums to ease the indigestion pains and are ready to move forward in this new retail landscape.

For brokers, deals are harder than ever because there are fewer tenants to market properties to with the bankruptcies that occurred during the recession, and the remaining retailers that are crawling back into expansion mode have become very conservative in the approval of new deals.  The good news is that all of the smart merchants had become very lean during the downturn, and most have some cash burning a hole in their pocket ready to get back into growth mode. Retailers have historically been very sheepish, which means as soon as the first few expand and show good sales volumes the rest will surely follow. Combine that with the American consumer's spending habits, and I expect measurable growth moving forward. Let's just hope that the new credit restrictions keep the shopper in check to avoid another blowout.

That the retail real estate market is getting back to fundamentals should bode well for Lafayette, since most of our property owners didn't give away the farm to the tenants who came begging. The majority of the big-box vacancies in the market are well located and surrounded by merchants that have had very solid year-over-year sales figures, which will only help excite new tenants as they do their research. Combine that with the newly opened Ambassador Caffery South extension, which finally produced the much-needed connectivity the national players look for, and we have a pretty good stew simmering in the ole' Cajun kitchen.
Keeping brokers afloat have mainly been the small-shop deals that have closed, since they are a bit easier to get financed and can be done by local franchisees or one-off entrepreneurs who have confidence in Lafayette and don't need approvals from corporate board rooms. I estimate that the Lafayette market has less than 10 percent small-shop vacancy; that segment is starting to get tighter, which will hopefully lead to new construction when the demand finally warrants it again. Getting financing for new retail construction will likely be the next headache requiring more than one extra-strength aspirin.
There is no doubt that activity has picked up greatly during the last 30-45 days, and all of the brokers I know surely hope it continues. If the retailers, brokers, developers and lenders all focus back in on the fundamentals that govern solid, smart growth, the light at the end of the tunnel will get a lot closer sooner than many thought in our markets. Be sure to thank those who learned to deal with crisis in the '80s locally, as they are a big reason Lafayette stayed true to the rules of the game and the bubble burst didn't sink us like it did back then.

Ryan Pécot is a commercial broker with Stirling Properties. Since 2001 he has worked out of the firm's Lafayette and New Orleans offices.