As published in Scotsman Guide's Commercial Edition, July 2012.
In this past April’s Property TypeCast, we suggested that retail fundamentals appeared to be turning the corner. Results from this past first quarter indicate that the retail recovery may have finally arrived.
Occupied stock in neighborhood and community shopping centers increased by 3.141 million square feet this past first quarter. This is the second-largest positive value for net absorption since the sector began losing occupied space in first-quarter ’08 — the largest gain occurred in the previous quarter.
Vacancies began to fall in the first quarter, declining by 10 basis points to end at 10.9 percent. In the lead-up to the recession, excess building was to blame for the increase in vacancies. Since the advent of the recession, supply growth has been virtually nonexistent, but negative net absorption drove vacancies upward. With supply growth remaining at minimal levels, the swing back to positive net absorption finally reached the tipping point for vacancy this past first quarter.
Asking and effective rents increased by 0.1 percent, in line with the changes from fourth-quarter ’11. This is the second consecutive quarter of rent increases and another cautiously optimistic sign for neighborhood and community centers. All these indicators are positive, yet lukewarm. A nascent recovery may be underway, unless external shocks force U.S. economic growth to reverse course.
Larger properties, like regional malls, posted relatively healthy results this past first quarter, with national vacancies declining 20 basis points to 9 percent. This was the second consecutive quarter of vacancy declines.
Asking rents grew by 0.2 percent, marking the third consecutive quarter of rent increases. Although regional malls are faring better than neighborhood and community centers at this juncture, this has as much to do with supply as demand. Although demand for malls, particularly higher-quality malls, is arguably stronger than demand for neighborhood and community-center space, regional malls did not experience massive supply increases before the recession the way neighborhood and community centers did.
Although demand drivers like increasing retail sales have helped, the dominant variable fueling the retail sector’s nascent recovery is constrained building. From 1999 to 2008, an average of 29 million square feet of new shopping-center space came online per year. That plunged to 13 million square feet in 2009 and remained low throughout ’10 and ’11.
More than two years ago, our forecasts suggested that retail vacancies could rise all the way through 2011, emphasizing how the sector was being battered by forces of historic magnitude (sctsm.in/3476). It is useful to look back and note how the sector has gotten past the worst and may be on its way up from the bottom. We are not projecting a V-shaped recovery, however, and dark clouds remain on the horizon. Reis expects the U.S. economy to grow at a modest 2.5 percent this year, which means we shouldn’t expect much of a boost from retail spending. Few retail tenants have plans to expand significantly, and many are still closing stores. But because the sector doesn’t have much of a supply glut, vacancies are starting to come down slowly.
Victor Calanog, vice president of research and economics at Reis Inc., writes a monthly column on property types for Scotsman Guide.
He and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at firstname.lastname@example.org.
Juan Bayas, retail analyst for Reis’s quality control department, contributed to this article.