Colliers International: Retail Highlights Fall 2010

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Colliers International: Retail Highlights Fall 2010

  1. 1. FALL 2010 | RETAILUNITED STATESHIGHLIGHTS Retail Slowly Getting Back to Normal RoSS J. MooRE Chief Economist | USA JARED DIENSTAg Regional Research Analyst After a very challenging period, most shopping centers are starting to show rising occu-MARkET INDIcAToRSRelative to prior period pancy and a firming of rents. Helping shopping center owners is an economy that is once again expanding and consumers who appear to have the confidence to go out and spend. Fall Spring 2010 2011* While the U.S. retail landscape continues to exhibit disappointing fundamentals, some segments are slowly beginning to show signs of life. Retail landlords and investors remain VAcANcy concerned about losing tenants, but not to the same degree as in 2009. Many landlords NET ABSoRPTIoN have now turned their attention to attracting new tenants and filling vacancies created during the economic downturn. Dominant regional malls and grocery-anchored neighbor- coNSTRUcTIoN hood centers continue to be the strongest performers, with outlet malls also enjoying a RENTAl RATE period of strong demand. Power centers, lifestyle centers and community centers are still *Projected struggling, but as with every downturn, the strongest centers continue to outperform their peers. With development at a virtual standstill, however, vacancy rates for these three retail formats should enjoy a modest decline.U.S. RETAIl MARkET The U.S. economy grew 2.5 percent in the third quarter, the fifth consecutive quarter ofSUMMARy STATISTIcS, Q3 2010 positive growth. Third quarter growth was up slightly from 1.7 percent annualized growth reported during the second quarter. Much of the increase in GDP came from growth inVacancy Rate: 10.9% Change from Q4 2009: 0.32 continued on page 3 U.S. RETAIl REAl ESTATE MARkET, Q3 2009 – Q3 2010Absorption, Year-to-Date:4.2 Million Square Feet 8 12.0 With the retail landscape much improved, retail 6 real estate fundamentalsNew Construction, Year-to-Date: 11.5 Million Square Feet5.4 Million Square Feet are sure to get better in 4 Vacancy (%) the coming quarters. 2 11.0Under Construction:5.0 Million Square Feet 0 10.5 -2Asking Rents Per Square Foot:Shopping Center Space: $16.24 -4 10.0 Change from Q4 2009: -4.85% Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Absorption Completions Vacancywww.colliers.com
  2. 2. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES U.S. RETAIl SURVEy EXISTINg NEW SUPPly NEW SUPPly UNDER ABSoRPTIoN ABSoRPTIoN VAcANcy VAcANcy QUoTED RENT cHg. IN INVENToRy* (SF) 2009 yTD 2010 coNSTRUcTIoN 2009 yTD 2010 RATE (%) RATE (%) SEP. 30, 2010 RENT yTD MARkET SEP. 30, 2010 (SF) (SF) (SF) (SF) (SF) DEc. 31, 2009 SEP. 30, 2010 (US$ PSF) 2010 (%) Atlanta, GA 137,557,000 1,524,000 65,000 357,000 (2,047,000) (523,291) 14.7 15.0 13.57 -7.5 Bakersfield, CA 8,916,000 – 0 35,000 – 76,746 – 7.5 15.32 - Baltimore, MD 46,362,000 609,000 30,000 144,000 (634,000) 244,888 8.7 8.6 18.63 -0.6 Boise, ID 12,250,000 – 82,000 14,000 – 257,927 – 12.4 12.27 - Boston, MA 85,857,000 690,000 292,000 135,000 (30,000) 394,101 8.1 7.6 15.70 -1.8 Charleston, SC 12,922,000 – 166,000 0 – 63,871 – 10.8 14.68 - Charlotte, NC 51,715,000 306,000 26,000 27,000 228,000 147,826 10.4 12.1 13.10 4.5 Chicago, IL 163,410,000 1,565,000 121,000 154,000 (520,000) (810,949) 11.7 12.4 16.19 -2.9 Cincinnati, OH 34,250,000 203,000 0 10,000 (322,000) (33,234) 13.4 13.0 11.09 -2.5 Cleveland, OH 51,046,000 266,000 106,000 20,000 (583,000) (39,997) 12.1 12.5 11.49 -1.4 Columbia, SC 15,040,000 – 30,000 0 – 181,699 – 8.4 11.19 Columbus, OH 28,451,000 412,000 59,000 181,000 474,000 220,714 15.0 13.8 12.01 6.0 Dallas/Ft. Worth, TX 151,308,000 1,457,000 299,000 272,000 801,000 (741,299) 13.0 13.3 13.22 -5.3 Denver, CO 69,031,000 221,000 233,000 258,000 (232,000) 544,200 10.9 10.3 14.47 -3.9 Detroit, MI 69,944,000 1,102,000 270,000 60,000 262,000 232,932 16.2 16.2 12.63 -3.6 Fresno, CA 24,701,000 – 0 0 – 48,749 – 10.9 13.64 - Ft. Lauderdale/Broward Co., FL 49,624,000 89,000 23,000 7,000 (1,450,000) 341,398 10.6 10.1 17.74 -5.2 Greenville/Spartanburg, SC 28,912,000 29,000 0 46,000 (427,000) 162,156 12.3 11.9 9.71 -5.1 Hartford, CT 41,422,000 646,000 6,000 109,000 327,000 246,691 8.6 8.1 13.55 -2.6 Hawaii 17,077,242 92,000 0 – 107,322 – 4.2 31.74 - Houston, TX 147,577,000 1,069,000 199,000 103,000 2,044,000 1,757,964 12.2 10.9 14.09 -10.0 Indianapolis, IN 38,650,000 173,000 26,000 9,000 (326,000) 242,593 13.8 13.2 11.89 -3.3 Jacksonville, FL 34,089,000 333,000 149,000 18,000 (856,000) (31,313) 13.2 13.5 13.81 -5.7 Kansas City, MO-KS 39,216,000 189,000 12,000 53,000 (27,000) 64,262 13.5 14.8 11.92 -2.1 Las Vegas, NV 49,666,000 577,000 161,000 43,000 (550,000) (240,801) 13.8 15.3 18.29 -16.1 Little Rock, AR 14,680,000 – 50,000 0 – 68,027 – 8.3 8.88 Los Angeles – Inland Empire, CA 83,672,000 1,329,000 53,000 115,000 (1,082,000) 771 11.7 11.8 18.10 -13.5 Los Angeles, CA 143,674,000 1,074,000 409,000 366,000 (1,022,000) 87,737 6.4 6.8 24.04 -1.1 Louisville, KY 27,172,000 – 76,000 51,000 – (344,097) – 11.8 11.19 Memphis, TN 29,519,000 24,000 25,000 116,000 106,000 252,087 12.6 12.7 10.96 -5.4 Miami/Dade County, FL 44,091,000 472,000 89,000 35,000 (455,000) 304,153 7.2 6.6 22.06 -4.8 Milwaukee, WI 33,627,000 146,000 18,000 250,000 (66,000) 85,242 11.2 11.3 12.26 -3.5 Minneapolis, MN 53,731,000 11,000 78,000 242,000 (214,000) 255,233 9.8 9.7 14.00 2.4 Nashville, TN 29,771,000 706,000 58,000 61,000 197,000 110,330 11.0 10.9 13.98 -5.9 New Jersey – Northern 90,870,000 463,000 576,000 297,000 (783,000) 192,828 8.1 8.5 19.72 -1.1 Oakland/East Bay, CA 42,445,000 132,000 38,000 39,000 (643,000) (14,315) 7.8 7.5 23.52 -5.7 Orange County, CA 62,257,000 222,000 3,000 18,000 (800,000) (247,687) 6.1 6.6 23.42 -4.3 Orlando, FL 62,386,000 888,000 92,000 203,000 (1,203,000) 180,318 11.8 11.7 15.92 -3.9 Palm Beach County, FL 35,984,000 244,000 16,000 20,000 (534,000) 100,219 11.1 11.1 18.07 -8.4 Philadelphia, PA 148,561,000 1,784,000 423,000 291,000 (800,000) 377,665 10.0 10.1 14.51 -1.4 Phoenix, AZ 102,755,000 1,290,000 225,000 36,000 (1,677,000) (853,012) 13.9 15.4 15.46 -6.4 Portland, OR 34,409,000 60,000 105,000 8,000 (377,000) 41,706 8.0 8.4 18.42 -0.6 Raleigh/Durham/Chapel Hill, NC 37,744,000 1,124,000 11,000 224,000 429,000 80,018 9.2 9.2 15.11 -6.7 Reno, NV 10,788,000 – 8,000 8,000 – (53,155) – 15.2 16.31 Sacramento, CA 48,302,000 314,000 74,000 0 (912,000) 128,753 13.6 14.0 18.24 -4.6 San Diego, CA 55,563,000 302,000 38,000 71,000 (842,000) 108,747 7.4 7.6 21.80 -2.6 San Francisco, CA 9,967,000 160,000 0 12,000 (35,000) 5,878 4.3 5.1 29.03 2.7 San Jose/South Bay, CA 31,498,000 40,000 235,000 29,000 (595,000) 45,588 6.2 6.9 27.17 4.3 Seattle/Puget Sound, WA 55,760,000 710,000 66,000 26,000 (273,000) (223,279) 8.8 9.9 18.37 -4.3 St. Louis, MO 51,852,000 167,000 22,000 0 91,000 465,994 11.6 11.1 12.73 0.6 Stockton/San Joaquin Co., CA 19,259,000 – 13,000 0 – (171,658) – 10.7 16.63 Tampa/St Petersburg, FL 86,186,000 1,039,000 112,000 0 (1,334,000) 98,247 11.0 11.2 13.88 -1.4 Washington, DC 81,185,000 812,000 36,000 398,000 (794,000) (6,929) 7.6 7.8 22.12 1.8 Westchester County, NY 52,349,000 109,000 141,000 30,000 427,000 266,686 6.7 6.6 19.22 -5.1 U.S. ToTAl/AVERAgE 2,971,972,000 25,082,000 5,446,000 4,997,000 (17,059,000) 4,150,000 10.58 10.90 16.24 -4.85*Includes Community and Neighborhood Centers. Source: CoStar, Colliers ResearchP. 2 | collIERS INTERNATIoNAl
  3. 3. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES U.S. gRoSS DoMESTIc PRoDUcT gRoWTH, 2001 - 2011 in October after producing mixed results through the year. The CCI 8 declined from 53.5 in August to 48.6 in September, but then 7 6 increased in October to 50.2. The October reading is a bit higher 4 5 than the 49.8 reported in October 2009, but is off from the 2010 3 high of 63.3 reported in May. Annual %, SAAR 2 1 0 -1 projected With the benefit of hindsight, it is apparent that the improved read- -2 -3 ings in the CCI earlier in the year came as consumers believed the -4 -5 economy was more on the mend than it actually was. Relief that -6 -7 the worst had passed was slowly replaced with nervousness -8 about the challenges that lay ahead and the lack of sustainable job 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: IHS Global Insight growth only reinforced people’s concerns.consumer spending (2.8 percent), equipment and software (16.8 There have been months in which the CCI improved, yet consumerpercent), exports of goods and services (6.3 percent) and federal spending levels headed lower so it would be a mistake to draw toogovernment consumption expenditures and gross investment (4.0 close a parallel, but the general trend in consumer confidence ispercent). Final sales of domestic product came in at 1.2 percent, usually instructive as to where retail sales are going. There mayhighlighting the tepid nature of the underlying economy. not be an exact relationship between the CCI and consumer spending, but they are closely connected. In summary, it is highlyAlthough the economy continues to underperform, other indica- unlikely consumer confidence will significantly improve (translat-tors displayed healthy growth. The Institute for Supply ing into stronger retail sales) until the labor market strengthens.Management (ISM) reported a modest increase, rising 2.5 pointsin October to register 56.9. According to the ISM index, new orders Without a doubt, the biggest challenge ahead for retailers and(+7.8) and production (+6.2) rose significantly in October, a retail landlords is the hole left by the loss of 7.5 million jobs sincewelcome sign and hopefully a harbinger of future growth. Of the the end of 2007. As this report went to press, the latest available18 industries tracked within the ISM index, 14 reported growth, statistics indicated a 9.6 percent national unemployment rate inhighlighting the broad nature of the recovery in manufacturing. October. This figure was unchanged from September, but lowerHowever, it was not all good news, as supplier deliveries (-1.1), than the 10.2 percent reported in October 2009. On a positiveinventories (-1.7), and backlog of orders (-0.5) all went in reverse. note, holiday season hiring is expected to increase this year.The Institute for Supply Management also reported a monthly HolIDAy SHoPPINg SEASoN PREVIEWincrease in the non-manufacturing sector, albeit at a slower pace October retail sales figures have been mostly positive, althoughthan the manufacturing sector. The October non-manufacturing growing at a relatively slow pace. The International Council ofindex came in at 54.3, a 1.1 point increase over the prior month. Shopping Centers (ICSC) reported that October comparable chainThe primary categories that saw growth includedbusiness activity (+5.6), new orders (+1.8), and prices coNSUMER coNFIDENcE SURVEy, 2002 - 2010(+8.2). Despite overall growth, the survey is clouded 120by mixed opinions regarding business conditionsvarying by industry and company. Both the manufac- 100turing sector and non-manufacturing sector indexes 80were characterized by rising employment, at +1.2 and Index 60+0.7 respectively. 40coNSUMER coNFIDENcE 20The key to any significant bounce back in retail is 0consumer confidence. The Conference Board’s 2002 2003 2004 2005 2006 2007 2008 2009 2010Consumer Confidence Index (CCI) increased slightly Source: Conference Board, Nov. 2010 collIERS INTERNATIoNAl | P. 3
  4. 4. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES RETAIl SAlES, lESS AUToS AND PARTS, JAN. 2001 - SEP. 2010 sales this year. The NRF predicts consumers will 12 spend $447.1 billion this holiday season. Last year, 10 sales rose slightly, increasing by 0.4 percent, after Annual Percentage Change (%) 8 declining 3.9 percent in 2008, the worst holiday shop- 6 4 ping season in over 40 years. The NRF recently 2 released its annual Holiday Consumer Intentions and 0 Actions Survey, which found that consumers plan to -2 -4 spend an average of $688.87 on their holiday shop- -6 ping this year, up 1.0% from last year. Spending on -8 gifts alone is projected to increase 2.1 percent from -10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 last year, for a total of $518.08. Source: U.S. Census Bureau It appears consumers are attempting to find the middlestore sales increased by 1.6 percent from October 2009. ICSC ground between the free spending years of the mid-2000s and theestimates that November sales will show annualized growth of sharp pull-backs of 2008 and 2009. Although the recession isthree to four percent, with many retailers expected to begin holi- technically over, most consumers continue to think twice beforeday marketing campaigns and sales earlier than usual. buying items that they do not consider to be necessities. WithSpendingPulse, a division of MasterCard, reported that year-over- unemployment remaining high, wage growth minimal and highyear total retail sales for October (excluding auto and gasoline) levels of personal debt, many consumers are simply not in a posi-grew by 2.7 percent, with apparel sales (8.2 percent), luxury tion to increase their holiday spending. However, there is another(excluding jewelry, 4.2 percent), and eCommerce (7.9 percent) segment of consumers who believe the worst is behind and that ifleading the way. It was disappointing, however, that the consumer they were going to lose their jobs, they would have done so byelectronics and appliances category declined by 3.1 percent. now. Members of this group have been conservative with their spending for the last two years, but now feel they can increaseFollowing lackluster years in 2008 and 2009, the National Retail their spending this holiday season—just not to pre-recession levels.Federation (NRF) is forecasting a 2.3 percent increase in holiday Unlike in recent years, retailers appear to be better prepared to yEAR-To-DATE SAlES ENDINg SEPTEMBER manage inventory levels this holiday season in order to avoid large ANNUAl quantities of unsold items. In the last few years retailers were cATEgoRy 2010 2009 cHANgE (%) forced to offer very steep after-holiday discounts to get unsold All Stores 3,221,217 3,031,686 6.3 Motor Vehicle and Parts Dealers 573,561 525,291 9.2 items off their shelves. Since retailers feel they have a better idea Gasoline Stations 322,027 273,507 17.7 of consumer spending this year, they are more likely to maintain Food and Beverage Stores 436,104 426,214 2.3 profit margins and be in a better position financially as 2011 Grocery Stores 390,610 381,852 2.3 begins. Also, many retailers are aggressively opening pop-up loca- Health and Personal Care Stores 194,348 188,378 3.2 Building Material and Garden 217,124 207,909 4.4 tions this holiday season as a method to increase sales and Equipment Stores another way to move inventory. General Merchandise Stores 432,031 419,573 3.0 Department Stores 126,893 127,791 -0.7 (excluding leased departments) We forecast improvement in holiday retail sales over last year, Clothing and Accessories Stores 150,909 144,512 4.4 particularly in light of the relatively successful back-to-school Furniture, Home Furnishings, Electronics 138,763 135,135 2.7 and Appliance Stores shopping period. Although holiday sales will be a far cry from the Furniture and Home Furnishing Stores 66,918 65,385 2.3 pre-recession years, a successful holiday season would be a great Electronics and Appliance Stores 71,845 69,385 3.0 boost to retailers and the general economy and provide momen- Sporting Goods, Hobby, Book and 60,925 58,760 3.7 tum going into 2011. Although most indicators point towards an Music Stores Miscellaneous Store Retailers 87,037 82,164 5.9 improved holiday shopping season, most consumers are focused Nonstore Retailers 253,372 224,093 13.1 on taking advantage of retailers’ sales and promotions, trying to Food Services and Drinking Places 355,016 346,150 2.6 purchase as much as possible without exceeding their budgets.Source: U.S. Census Bureau. Overall, most retailers should come out of the holiday shoppingAll values are expressed in millions of U.S. dollars and are not seasonally adjusted.P. 4 | collIERS INTERNATIoNAl
  5. 5. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATESseason with a modest increase in sales and a little more confident these markets have been able to weather the storm slightly betterabout expansion and possibly new stores. because a majority of them have growing populations, positive demographics and barriers to entry (new construction).RETAIl SAlES By cATEgoRyYear-to-date (YTD) sales to the end September rose 6.3% over the In many of these markets, expanding retailers have taken advan-same period in 2009. However, this number was skewed by autos tage of vacant space that was returned to the market and as a(and parts) and gasoline sales which expanded by 9.2% and 17.7% result prevented vacancy rates from skyrocketing. However, inrespectively. By comparison the bellwether general merchandise many cases the high number of retailers that have either gonegroup registered YTD gains of 3.0%. Within the various retail out of business or closed locations has been too great forsectors the most rapid growth (excluding autos, gasoline sales and expanding or new retailers to occupy all of the vacant space.non-store retailers) were clothing and accessory stores along with Since each market has been impacted by different factors, recov-building material and garden equipment stores with YTD growth of ery will vary in both timing and strength but a key theme running4.4%. At the other end of the spectrum was department store sales through every market will be an upturn in housing and thewhich contracted by 0.7% YTD. Posting modest growth were furni- creation of new jobs.ture and home furnishing stores that saw YTD sales grow by 2.3%.Grocery stores also saw YTD sales grow by 2.3%. occUPANcy gRoWTH/ABSoRPTIoN TRENDS Year-to-date absorption through to the end of the third quarterRETAIl VAcANcy registered 4.2 million square feet, a significant improvement fromDespite the fact that several major U.S. markets are beginning to last year when full year 2009 occupancy levels dropped by 17.1see vacancy rates level off, or in some cases decline, the majority million square feet. Unlike last year, a majority (38) of the 53of markets are still characterized by rising vacancies. Overall major markets tracked posted positive occupancy gains in the firstvacancy for the U.S. shopping center market at the end of the third nine months of 2010. By far, the Houston market recorded thequarter stood at 10.90 percent, a modest increase from 10.58 greatest increase in occupancy with net absorption exceeding 1.7percent recorded at the beginning of the year. Of 54 major U.S. million square feet. Including Houston, seven markets (Boston,markets, 17 recorded vacancy of 12 percent or higher, up from 15 Denver, Ft. Lauderdale-Broward County, Miami/Dade County,metros at the end of the fourth quarter of 2009. Detroit remains at Philadelphia, and St. Louis) recorded YTD net absorption in excessthe top of the list with a third quarter vacancy rate of 16.2 percent. of 300,000 square feet by the end of the third quarter. Much ofOther markets that reported vacancy greater than 15 percent the recorded occupancy gains came from national retailers whoinclude Atlanta, Las Vegas, Phoenix, and Reno. Detroit’s economy have been increasing their market share by opening new locationshas been battered by the fall of the automotive industry, while the at sites that were previously thought unattainable. Although posi-others were significantly impacted by the collapse of the residen- tive absorption clearly does not guarantee a healthy market, it istial real estate market. Booming housing markets caused retailers encouraging that many markets are now characterized by occu-to open up new stores and led to a jump in retail construction. As pancy gains and not contraction.foreclosures picked up and residential property values fell sharply,once-full shopping centers witnessed significant blocks of space Despite overall positive absorption, there were still markets that sawbecome vacant. Until the housing market stabilizes and unemploy- negative absorption. Atlanta, Chicago, Dallas/Fort Worth, Louisville,ment declines, vacancy rates are likely to remain high in these and Phoenix all saw occupied space contract by more than 300,000markets. Cities that recorded a 100 basis point increase or more in square feet. Several of these markets were some of the hardest-hitvacancy during the January – September period were Charlotte, regions in the housing collapse, with a resulting collapse in demandKansas City, Las Vegas, Phoenix, and Seattle/Puget Sound. On a for retail space. Markets that registered negative absorption havepositive note, 16 markets reported a decline in vacancy. However, not been aided by national retailers’ increasing their presence or theonly two (Columbus and Houston) experienced a decrease of creation of “mom and pop” shops and regional retailers that havemore than 100 basis points during the same period. typically been a key source of demand.Of the 20 markets that have vacancy rates lower than 10 percent, RETAIl coNSTRUcTIoN18 are located on either the East or West coasts, with only two With most major markets oversupplied, and demand for retailmarkets (Little Rock and Minneapolis) being non-coastal. Most of space still relatively tepid, it comes as no surprise that new retail collIERS INTERNATIoNAl | P. 5
  6. 6. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATESconstruction remains soft. New retail develop- U.S. RETAIl REAl ESTATE INVESTMENT PERFoRMANcE, 1999 - 2010ments added to the market in the first three 60.0quarters of 2010 totaled just 5.5 million square 46.8feet, compared to 25.1 million square feet in 40.0 40.0 30.4 29.02009. Of the 54 major markets tracked, three 27.2 28.3** Annual Total Returns % 21.1 17.1 23.0 20.0 20.0 18.0added in excess of 300,000 square feet; Los 9.6 13.7 11.8 13.4 13.5 7.8 6.7 7.5*Angeles, Northern New Jersey, and Philadelphia. 0.0Both Los Angeles and Northern New Jersey -4.1 -11.8 -11.9recorded single-digit vacancy rates with -20.0 -15.8Philadelphia just above 10 percent (10.1 percent). -40.0More markets than not (36) have added less -48.4than 100,000 square feet to the market thus far -60.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010in 2010, compared to only six markets in 2009. * YTD 2nd Quarter returns only Private Equity Public Equity ** YTD Oct returnsWith regard to projects under construction at the Source: National Council of Real Estate Investment Fiduciaries, National Association of Real Estate Investment Trustsend of the third quarter, the total for all marketswas only 5.0 million square feet. Only threemarkets (Atlanta, Los Angeles, and Washington, DC) have over $17.07 per square foot at the beginning of the year - a drop of300,000 square feet under construction. Developers remain 4.85 percent. Markets that experienced the sharpest declinescontent to wait on the sidelines for the retail market to pick up include Las Vegas (-16.14 percent), Los Angeles-Inland Empirebefore they proceed with any new centers. A combination of little (-13.48 percent), and Houston (-10.03 percent). Although askingdemand and a very challenging financing environment will keep rental rates have declined almost 5.0 percent across the country,new retail projects to a minimum for the next few years. Similar to it is more accurate to emphasize that actual rental rates (afterthe office market, going forward most retail projects that do get concessions) have dropped anywhere from 10.0 to 20.0 percent,underway will have to secure pre-leasing commitments prior to depending on the market. Not all markets recorded declines:breaking ground which should help to prevent large vacancies Charlotte, Columbus, Minneapolis, San Francisco, San Jose/Southdeveloping any time soon. Bay, St. Louis, and Washington, DC all experienced an increase in asking rental rates during the first three quarters of the year.RENTAl RATE TRENDSAs expected, the majority (37) of the 54 surveyed markets During 2009 and the beginning of 2010, not only did landlordsrecorded rental rate declines during the first nine months of 2010. lower asking rental rates for new leases, but both local “mom andA significant portion (15 markets) experienced a decline of at least pop” shops and national retailers asked landlords for rent relief on5.0 percent. As at the end of the third quarter, the annual average existing leases; and in most cases, compromises were reached.asking rental rate was $16.24 per square foot, compared with However, with retail conditions on the upswing reducing rents on existing leases has largely come to an end. Most landlords agreed RETAIl SPAcE DElIVERIES, 2000 - 2011 to reduce rental rates on existing leases because the fear of losing 250 tenants far outweighed income loss from lower rental rates. Landlords already had to worry about filling vacancies left by 200 tenants that could not be saved by reducing rent, so if they could Squore Feet, Millions prevent further vacancies, they were mostly willing to negotiate 150 with retailers. The consensus now is that retailers that required rent relief on existing leases have already received it. However, 100 leasing dynamics still remain in the tenants’ favor with the econ- 50 omy far from robust and consumer spending remaining relatively fragile, landlords are still being pressured to lower rents and offer 0 generous tenant improvements (TI’s). Because of high vacancy, a 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* lack of expanding retailers, and the extremely low number of new Source: CoStar *projected retail businesses being formed, tenants have plenty of leverageP. 6 | collIERS INTERNATIoNAl
  7. 7. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATESwhen negotiating lease terms with landlords. Retailers also hold signed long-term leases with regular rent increases. Anothermost of the power in renewals: in order to prevent tenants from retail property type that should see an increase in activity does notleaving their current space, landlords are being forced to offer have a label, but are generally 5,000 to 10,000 square feet andcompetitive lease terms on renewals. However, top tier shopping contain multiple tenants (typically three to five), at least two-thirdscenters where retailers continue to report high sales have been of which are national tenants. These are attractive to investorslargely immune to this trend of concessions and lower lease rates. because most of these tenants signed long-term leases with regu- lar rent increases, similar to single-tenant triple-net leased prop-lookINg AHEAD erties. As for shopping centers, grocery-anchored neighborhoodRetail has always been highly sensitive to the economic cycle, and centers are expected to account for most retail properties tradingin particular employment, but this has probably never been more hands as investors look to purchase properties that are well-true. Consumers remain cautious and until a more robust recovery leased and easiest to fill if vacancy occurs. The overall volume oftakes hold, are unlikely to return to their spendthrift ways. As a sales transactions is expected to increase by at least 20% in 2011result, retailers will be highly selective when opening new stores as more investors return to the market in search of yield and theand are likely to only pursue what they consider the “best real stable nature of retail real estate.estate” in the market. Although some consumers are slowlyincreasing their spending, believing the worst is over, a large S&P RETAIl INDEX (RlX), NoV. 2007 - NoV. 2010segment of the population still is not ready to splurge on unneces- 500sary items. In the meantime, retail sales will fluctuate month-to- 475month, with most retailers reporting moderate year-over-year 450 425increases. Core properties located in well-populated areas are 400 375expected to see increased foot traffic and sales, while centers that 350 Indexwere built in communities based on future housing development 325 300will see little improvement anytime soon. 275 250 225Although credit markets have been slow to loosen up, it is encour- 200 175aging to see more lending institutions open to investing in 150commercial real estate. Unlike the pre-recession years when lend- 2007 2008 2009 2010ers were quick to provide debt capital, financing will primarily only Source: MarketWatch.combe available for core assets that do not pose any significant degreeof risk. Even though lenders are expected to be more accommoda-tive in 2011 than in recent years, they will remain very selective in We expect retail vacancies to be marginally lower by the spring aswhich properties they lend against, following strict underwriting occupancy gains should exceed any new supply that comes on tostandards. Poorer quality properties will continue to sit on the the market. Although each market should be viewed separately,market as the sellers of these properties find it difficult to attract average asking rental rates across the country will most likely bebuyers (and lenders) willing to take on the risks associated with flat at least through to the middle of 2011, while construction willinvesting in non-core assets. continue to decline for the foreseeable future. Retailers that survived the recession will continue to focus on increasing theirWe anticipate the sales market will remain dominated by prime market share as they take advantage of low lease rates offered byreal estate occupied by well known retailers, preferably with landlords who are extremely motivated to fill large vacancies.strong credit ratings. Single-tenant triple-net leased properties Landlords of specialty or themed centers will look to repositionare sure to remain in high demand also. Triple-net properties were their properties by attracting tenants that are expanding in whatthe first retail property type to witness a drop in cap rates and are can only be described as a very “challenging” leasing environ-more than likely to continue leading cap rates lower. Strong retail ment. Discount stores, athletic gyms, apparel discounters, groceryproperties are sure to continue attracting multiple bids and occa- stores, and quick-service restaurants are almost certain to be thesionally command sale prices higher than the asking price. Single dominant retailers active in the marketplace. Progress is likely totenant triple-net leased properties in particular will continue to be be slow but the retail landscape will almost certainly look better ashighly sought after because they offer investors a low-risk invest- 2011 unfolds. There will be no easy fixes and unfortunately ament through tenants who typically have strong credit and have “rising tide will not raise all boats.” collIERS INTERNATIoNAl | P. 7
  8. 8. HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES 480 offices in 61 countries on 6 continents United States: 135 Canada: 39 Latin America: 17 Asia Pacific: 194 EMEA: 95 • $1.9 billion in annual revenue • 2.4 billion square feet under management • Over 15,000 professionals collIERS INTERNATIoNAl 601 Union Street, Suite 4800 Seattle, WA 98101 TEl +1 206 695 4200 FAX +1 206 682 7937 FoR MoRE INFoRMATIoN Ross J. Moore Chief Economist | USA TEl +1 617 722 0221 EMAIl ross.moore@colliers.com Copyright © 2010 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Accelerating success.www.colliers.com

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