Quarterly Retail Update: Investors Respond To Improving Conditions for Shopping Center Owners, Tenants
Buyers Hope to Capitalize On Improving Occupancies And The Spector of Rent Gains For The Next Few Years
By Randyl Drummer
August 10, 2011
Retail property sales volume bounced back from the doldrums in the first half of 2011, with $19.4 billion in assets trading in the second quarter alone — three times the volume of 2009, CoStar economists said.While overall investment sales volume has returned to 2007 levels, a much larger share of the pie qualifies as distressed assets compared with that period. One of the largest commercial real estate deals since the credit crisis closed in the most recent quarter, Blackstone Group’s $9 billion acquisition of a distressed portfolio of 585 shopping centers in 39 states totaling 92 million square feet from Centro Property Group.Investors appear to be reacting positively to strengthening retail sales and improving shopping center fundamentals, said Real Estate Strategist Suzanne Mulvee in CoStar Group’s Mid-Year 2011 Retail Review and Outlook.
The quarterly review and forecast was co-presented with Real Estate Strategist Kevin White and Real Estate Economist Ryan McCullough.”We’ve seen another quarter of positive absorption and supply shutdown, while vacancy rates are reacting appropriately, and we’re even talking more rent growth,” Mulvee said. “Deleveraging still needs to happen and there are some constraints on debt capital, but there are active players who are bringing footing back to the market — a good sign.”The largest year-over-year sales volume increases were in the supply-constrained markets Long Island (3%), Washington, D.C. (2.7%) and Chicago (2.5%). Even markets hurt by the housing bust such as Atlanta, Phoenix and the Inland Empire saw sales gains of 2.3% to 2.5%, however, as opportunistic investors scooped up distress deals.In Atlanta and Phoenix, 40% or more of total sales volume was distressed in some way, and more than 25% of deals in the Inland Empire area of Southern California.
That said, distress as a percentage of total sales volume fell to 17% from 20% the same time a year ago in retail. And shopping centers are faring better than such product types as hospitality, where 50% of total sales were distressed in the market bottom, a level that has fallen to 35% this year.
In addition to the vast Centro portfolio, large deals that closed in the second quarter include the following:
- JP Morgan sold a 37% interest in the 10.1 million-square-foot Mayflower New England-based mall portfolio to the Canada Pension Plan Investment Board for $350 million, an example of the flight to safety by institutional investors;
- Charter Hall REIT sold its 60% joint-venture interest in 28 properties to The Desco Group for $168 million;
- Simon Property Group sold the 410,000-square-foot Prime Outlets in Ohio to Tanger Factory Outlet Centers for $134 million;
- Lincoln Square LTD sold the 444,500-square-foot Lincoln Square-Arlington, TX, to a JV of Dunhill Partners and RioCan REIT for $70.7 million.
Vacancies Falling, Demand On the Rise
The U.S. retail real estate vacancy rate held steady at 7.1% at mid-year as retailers continued to positively absorb modest amounts of space in an environment of increased retail sales and almost no new construction, CoStar said.
“With this extremely low level of supply, even low levels of absorption will continue to push the needle down,” McCullough said. “Even in a slow growth economic scenario, we would still expect to see vacancies recede a bit.”
While vacancies are trending down, retail availabilities – spaces such as Borders bookstores that are not yet vacant but soon will be — are still quite high.
“A lot of the space is already being actively marketed by landlords, which can be construed as a positive sign that they are confident and optimistic they can find another tenant,” McCullough said. “The standard Borders floor plate and the locations they are in are among the most readily absorbed type of space in the market today, so we anticipate that space will move quite quickly.”
While many centers are maintaining high occupancy rate, others are seeing a ballooning in vacancies, with very few centers in the middle amid the bifurcated market conditions. In many cases, the centers that have survived and thrived are benefiting from the sales dollars diverted from rivals who have lost stores, Mulvee said
“Similar to the office and even the apartment markets, there’s a flight to quality,” Mulvee said. “When rents come down, tenants take advantage. The recession showed the weaker centers for exactly what they were, weak, and it’s a good guess that some of those centers are never coming back.”
Leasing remained strong, approaching 60 million square feet in the second quarter, a good sign that demand will grow even as absorption dropped off amid negative economic signs in the first two quarters.
Absorption was relatively light at 9 million square feet in the first quarter and 10 million in second quarter. CoStar expects it to plod along at flat levels for another quarter or two as the Borders closures and others add space to the market. Overall, however, retail sales numbers and leasing activity are strong and will support increased absorption — barring a serious setback to the economic recovery or relapse of the downturn, of course.
One bright spot is that demand growth in the largest markets is gaining momentum, with most markets showing a distinct improvement in demand. Denver, Seattle and Houston, markets associated with energy or high tech, are seeing the strongest growth. Even housing bust markets such as Atlanta, Inland Empire and Phoenix are seeing momentum toward growth, and most CoStar submarkets are seeing vacancy rate declines.
With many national retailers seeing improved financial results and beginning to cautiously think about expansion, malls enjoyed the lowest vacancy rate among retail property segments at 5.4%.
On the other end of the extreme, strip centers and neighborhood centers, where mom-and-pop and independent tenants continue to struggle, are seeing vacancies of 11.6% and 11.5%, respectively.
Another silver lining is power centers. The most heavily built product type over the last cycle, they remain the most actively leased space in retail. At 6.8%, power center vacancies are in line with historic averages. Outlet centers, where supply is also tight, are at 6.5%.
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