REAL ESTATE NEWS

Retail development was more forgiving in the period immediately following the pandemic, when low interest rates and discount rates supported project assumptions even if a deal took years to move from planning to completion, according to Richard Green, director of the USC Lusk Center for Real Estate.

"That was an environment where, if you did a pro forma coming out of COVID, everything worked," Green said during a policy session at ICSC@Western.

That cushion has largely disappeared. While retail performance has held up, Green said rents have not increased enough to keep pace with expenses. Higher insurance costs, rising property taxes in some markets and growing labor costs are squeezing net operating income, while the cost of capital has made new development harder to finance.

"When those expenses are combined, the effect is pressure on a property's net operating income," Green said. "You put all of that together, and your NOI has been shrinking."

For investors and developers, that leaves less room for error. A delayed approval process can expose a project to changing financing costs, tenant decisions and market conditions before it ever reaches the construction phase.

Higher Costs Raise The Stakes

The core challenge is not simply that development costs more than it did several years ago. The economics can change substantially during a lengthy entitlement and permitting process.

Even when inflation raises a project's top-line revenue assumptions, Green said, higher capital costs can still make the deal less feasible. The financial assumptions that supported a project several years ago cannot automatically be carried forward into today's environment.

Insurance has become a particular concern as natural disasters affect markets across the country, Green said. Property-tax burdens also vary widely by jurisdiction, with California and Florida representing very different policy environments. Labor costs have risen as well.

Together, those pressures make speed more valuable. A project that remains in review for years can face a materially different rate environment and cost structure by the time it is ready to break ground.

Permitting Delays Can Reshape A Deal

Mark Schurgin, co-founder and chairman of Festival Companies, said time is one of the most consequential variables developers must manage.

"Your time is the thing that always gets you in trouble," Schurgin said. "Longer costs you more, slows you down, and puts you in relative relationships with changes in the economy and tenant changes."

A developer may initially expect an approval process to take two years—a lengthy timeline on its own—but the larger risk is what can change during that period. City personnel may turn over. A tenant may decide not to move forward. Market conditions may shift. Each change can force developers to revisit key elements of a project.

"You have to essentially start over in a lot of places," Schurgin said.

That uncertainty makes municipal relationships and a clear understanding of local priorities especially important. Before approaching a city, Schurgin said, developers need to understand what the municipality wants from a project and what requirements it considers essential.

"Your biggest problem is when you go to a city, you have to figure out what the city wants," he said.

A capable city manager, adequate staff and municipal interest in a project can help a development move more efficiently through the process, Schurgin said. The issue is not whether a city imposes requirements, but whether developers can understand them early and work through them without unnecessary delays.

"They will have requirements, and might be tough, but that is the best city to have," he said. "The rest is negotiation."

Cities Seek A More Coordinated Process

From the municipal side, Julian Jacquin, director of economic development for the Town of Erie, Colorado, said communities across the country are confronting similar pressures. The challenge is ensuring that planning, land-use, zoning, design and engineering requirements work together instead of operating as disconnected steps.

"No community is unique," Jacquin said.

Problems emerge when individual departments focus on their own requirements without considering the broader development process, he said. Municipalities need a solution-oriented structure that manages those overlapping responsibilities and keeps the review process aligned with the project's overall goals.

"It is important to have someone involved in the conversation who can look at the bigger picture and make sure the different parts of the process are working toward the same goal," Jacquin said.

Municipalities continue to look for ways to improve plan review, he said, but meaningful improvement requires more than speeding up individual approvals. It depends on coordinating the departments, policies and requirements that shape a project from entitlement through construction.

For retail developers and investors, that coordination can be as important as market fundamentals. In a higher-cost environment with thinner margins, a predictable path through local approvals may determine whether a project can move forward at all.

Check back with GlobeSt.com for more from the ICSC@Western event.

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Source: GlobeSt/ALM