Nationwide retail vacancies finally peaked in the mid-10% range in last summer, sovaldi but have since dropped only slightly to the low 10% range. Growth in tenant demand in recent quarters has been positive, recipe but thus far has been relatively lackluster (approximately 0.6% annualized growth in occupied space in recent quarters). Retail firms have been cautious about expanding, waiting for a clear sign that the consumer is back. The good news is that retail construction has fallen to at least a 20-year low, paving the way for a more robust recovery by 2012 or early 2013. Rental rates in this have stabilized some, with modest increases in power centers and in malls, but modest declines in neighborhood centers and in strip retail.
The surprising improvement in retail sales since the lowest point of the recession is a promising sign for the sector’s recovery but after digging into the numbers, the results show a mixed bag. To start, it is very encouraging that core retail sales in the United States, excluding auto and gas sales, have exceeded the pre-recession high since mid-2010 and are now well above that level. This reflects much stronger consumption than anticipated. However, the fastest growing retail segment has been non-store sales. E-commerce, having matured and evolved substantially since the dotcom era, is rapidly eating into traditional sales, accounting for 9% of total sales compared to 7% just two years ago. In recent quarters, category killers such as Best Buy have reported increasing competition from online sales and many traditional retailers have expanded their non-retail sales faster than traditional retailing.
Some analysts also believe that discretionary spending among consumers who have lost their homes or stopped paying their mortgages is also impacting sales, which does not reflect improving fundamentals. The bottom line is that retail sales have regained their footing, but further consumption growth is likely to be slow. The economy has to be propelled by corporate capital investments and hiring, both of which are improving thanks to stellar profit growth. Economic growth should remain strong enough to further support overall retail sales, tenant expansions and vacancy reductions but tenant mix and growth prospects should be examined and underwritten carefully in a fast-changing retail landscape.
The recovery will also differ greatly by metro. Short-term investment opportunities exist in a number of high-beta MSAs – markets that experience rapid employment and population growth in recovery years – especially in the Sun Belt and West. With construction financing still generally hard to obtain, vacancy rates can drop quickly in these MSAs. And rental rates can climb rapidly once a tightening begins. Examples of these markets include Atlanta, Phoenix, the Inland Empire, Dallas, Houston, parts of Florida and last but not least, Las Vegas. However, an investment in these markets must take the long-term risk of future supply into account.
Particularly strong long-term investment opportunities exist in a number of coastal MSAs. We project that by year-end 2011, vacancy rates will be sub-7% in the following areas: San Francisco, San Diego, San Jose, Los Angeles, Orange County, New York, Washington D.C., Boston, Portland and Baltimore, respectively, by order of lowest projected vacancy rates of 3.9% – to highest projected vacancy of 6.8%. Not only are these areas expected to have low vacancy rates in the near-term, but their long-term exposure to supply risk is limited.
While retail investment activity has increased, sale prices per square foot have remained generally flat with the exception of top-tier institutional assets and stable, infill shopping centers. The spread between cap rates for retail properties sold in 2010 and 10-year Treasuries was nearly 500 basis points, a 20-year high. This presents significant opportunities to lock in low interest rates ahead of rent growth and improvement in values, but market selection must be a key component.(credit, h, nadji, globe st)