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INFRASTRUCTURE BOOM AHEAD

The U.S. is on the cusp of what may prove to be the biggest wave of infrastructure spending since the New Deal, and it will be a boon for retail real estate, says Dale Anne Reiss, head of Ernst & Young’s global real estate practice. “There is a growing realization that much of our infrastructure is aged and brittle, and my bet is the public purse strings are going to be opened far more for major infrastructure building and rebuilding over the next 10 years, and well beyond what is currently planned for hurricane-ravaged Gulf states,” she said. According to conservative estimates, the U.S. needs to spend $1.6 trillion over the next five years to repair and build highways, bridges, dams, airports and railroads.

The ball is already rolling: New York state has approved a $2.9 billion plan for transportation upgrades, while California’s Contra Costa County plans to issue $10 billion in bonds to finance transportation hubs. “These initiatives are likely to produce billions of dollars in ripple-effect commercial development and investment opportunities over the next 10 to 20 years for the private sector,” Reiss said. A good example of the creation of private investment opportunities through infrastructure investment, she says, is the $2 billion Trans Bay Terminal project in San Francisco. This conversion of a bus terminal into an intermodal public transit complex could spur some $10 billion to $20 billion in commercial and mixed-use development in the immediate neighborhood over the next 10 years, local experts say.

“Duplicate this in the 50 major U.S. metro markets, and it is not hard to see what impetus commercial development could receive from infrastructure-related investments,” Reiss said. Other examples in the U.S. include the $3 billion plan to rebuild New Orleans, Boston’s “Big Dig” and New York City’s $6 billion program to upgrade its water delivery system via City Water Tunnel No. 3. And it’s a global phenomenon too, she says, pointing out that infrastructure issues play out just as importantly in China, India and Russia, as well as Europe and South America.

REITS: FAST TENANT TURNAROUND TIME BOOSTS NOI

Mall landlords are more immune to retailer bankruptcies these days, because they’ve learned to streamline the process of identifying traffic-challenged tenants, buying out their leases and readying replacement tenants, says Robert A. Michaels, COO of General Growth Properties. “We work out much earlier in the year trying to define which retailers are in trouble,” Michaels said on the firm’s first-quarter earnings call, and “who might be a candidate to buy out.”

General Growth pocketed about $19.4 million in lease-termination fees from retailers during the quarter ended March 31, he said, pointing out that Casual Corner owner Retail Brand Alliance paid about 30 percent of that. Another retailer paid more than $1 million to get out of its collective leases, he said.

These fees essentially become icing on the cake if a new tenant is able to open shop and start paying rent as soon as the old tenant moves out, executives say. “New tenants need to be ready to open as soon as the space is free,” he said, with lease negotiations and store planning for the new tenant already completed. “It’s part of the business today,” Michaels said. “And even though it may be smaller next year at this time, I would expect to see lease-termination fees continue to be fairly substantial in coming years.”

Simon Property Group, too, was able to minimize the impact of bankrupt tenants on its first-quarter occupancy and net operating income. Only about 115,000 square feet of space went dark from tenant bankruptcy, versus 250,000 square feet for the year-earlier quarter, says Simon CFO Stephen E. Sterrett. Tenants have become more adept at navigating the bankruptcy process, which has allowed landlords to replace them faster, says COO Richard Sokolov. “The bankruptcy process has gotten so sophisticated,” said Sokolov on the firm’s earnings call, “that real estate plans are already in place before they file.”

VACANCY RATES INCH UP AT U.S. OPEN-AIR CENTERS

U.S. open-air shopping center vacancies edged up to 6.9 percent during the first quarter, from 6.8 percent at the end of 2005, according to an analysis of 67 major U.S. markets by research firm Reis. The rise was triggered by the sector’s lowest absorption rate in four years. Open-air tenants absorbed 2.9 million square feet in the first quarter, Reis reports, down from 8.6 million in the fourth quarter of 2005. Large public REITs were affected too. Acadia Realty Trust said occupancy fell to 93.7 percent for the first quarter, versus 94.3 percent the previous quarter. Federal Realty reported 94.8 percent occupancy for the first quarter, compared with 96.3 percent the previous quarter. And Kimco Realty Corp. and Pan Pacific Retail Properties, reported flat occupancy levels quarter on quarter. Asking rents at open-air centers continued an upward trend, growing 0.8 percent to $18.55 per square foot in the first quarter compared with the end of 2005.