Leasing, Absorption Improves for U.S. Retail Market Amid Mixed Economic Signals

Rents, Sales Volume Still Slow to See Improvement, Most Fundamentals Point to Continued Recovery In Retail SectorRetail leasing and occupancy continued to improve across the country in the third quarter of this year and is expected to strengthen over the next two to three years as growth in jobs and consumer spending lead to greater sales and profits for retailers and renewed demand for store space in malls and shopping centers. 

As long as recovery continues in the broader economy and the amount of new supply delivered remains low, retail vacancy rates should continue to decline through mid-2013. Absorption of retail space, which has been positive for five straight quarters, should continue through at least mid 2012, CoStar Group forecast in its Third Quarter 2010 Retail Review and Outlook this week.

The positive indicators in the retail leasing market in the third quarter follow similar recovery stories reported by CoStar taking place in the office and industrial markets.

“If you look at where vacancy rates are headed, we’re expecting a pretty bullish recovery,” said CoStar Real Estate Strategist Suzanne Mulvee, who co-presented the retail market report with Director of Analytics Jay Spivey. “We see the recovery playing out. Not only are consumers spending more, we’re seeing it translate into positive absorption in the space market.”

Rents are still declining but at a slower rate, and falling vacancies and shrinking supply will gradually shift the imbalance between supply and demand and lift retail rental rates and sale prices.

The national retail vacancy rate edged down slightly from 7.4% at midyear to 7.3% in the third quarter, although the availability rate — space that’s being marketed but is not yet vacant — is still hovering around its peak of around 10%.

While it pales compared with the peak years of the mid-2000s, the 12.9 million square feet absorbed in the 62 largest U.S. retail markets in the third quarter marks the fifth consecutive quarter of positive absorption since the nation recorded 26.7 million in negative absorption in first half of 2009. While 12 of the top 20 retail markets posted negative absorption in 2009, only three recorded net loss of occupancy in the third quarter, including Phoenix (-749,000 square feet), Atlanta (-408,000 SF) and Chicago (-313,000 SF).

As usual, energy rich Houston, largely sheltered from the effects of the housing downturn, absorbed the most retail space during the third quarter at 3.02 million square feet. Supply-constrained markets in the northeast and mid-Atlantic rounded out the top five markets with positive absorption: Long Island, 2 million square feet; Washington, D.C. 1.83 million SF; Boston, 1.78 million SF and Northern New Jersey, 1.76 million SF.

Markets in Texas, where the housing crisis did not cause as much economic harm as other states, have fared better in retail leasing and occupancy than residential bust markets like California, Florida, Nevada and Arizona. Markets with a retail space overhangs like Phoenix, Denver and Atlanta may take a bit longer to turn the corner into recovery.

Year-to-date leasing statistics show that discount retailers like Dollar Tree continue to dominate leasing activity, both in the number of locations and the square footage leased. Service providers like Verizon Wireless are very active in leasing new, albeit smaller, spaces.

The number of retail centers with very high vacancies is also declining. According to a CoStar analysis, the number of properties that fell below 80% occupancy, a sign of severe distress, declined in the third quarter compared with fourth-quarter 2009, which marked the market trough. With mom-and-pop retailers still hurting, the number of community shopping centers with occupancies of less than 80% is still increasing somewhat, as is the number of regional malls with high vacancies. However, the number of power, lifestyle and strip centers with sub-80% occupancies has declined since late 2009.

Overall retail investment sales remain among the lowest of the major property types as measured by square feet sold as a percentage of total market size. Sales volume is well below historical levels, and the percentage of sales involving distressed properties has risen steadily for five quarters, Spivey said. That said, retail properties didn’t see the dramatic sales spikes — and steep declines — experienced in the office and multifamily markets during the 2004-07 boom era and the subsequent recession.

There are some positive signs for retail owners. The average number of days that properties are on the market prior to being sold is leveling off at around seven months. Buyers and sellers appear to be coming closer to agreeing on prices. The final sale price as a percentage of asking price in transactions rose higher in the third quarter. Unsold space withdrawn from the market by sellers is also leveling off.

Almost 33% of sales volume was comprised of portfolios in the most recent quarter, even higher than the 28.2% at the height of the market in 2007, Spivey said. Buyers are also going for more conservative investments. Triple-net investment sales, a traditional flight to safety for investors, are higher this year and well above long-term averages as a percentage of total sales volume.

Several of the top retail sales in the third quarter were portfolios, and most of them involved REITs as a buyer or seller. They include the following:

  • Simon Properties bought a portfolio of 20 shopping centers in 15 states from Prime Retail on Aug. 30 for $2.3 billion, or $293 per square foot, at an 8% capitalization rate.
  • Cedar Shopping Centers bought five shopping centers in Pennsylvania and New Jersey from Pennsylvania REIT on Sept. 29 for $135 million, or $110 per square foot, at a 6% cap rate.
  • LaSalle Investment Management bought San Jose Market Center in San Jose, CA from Cousins Properties on July 8 for $85 million, or $236 per square foot, at an 8.22% cap.
  • Cole Credit Property Trust bought Whittwood Town Center in Los Angeles from Morgan Stanley on Aug. 27 for $83.5 million, $123 per square foot, at a 6.5 cap rate.

Source:  CoStar


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