There’s been surprising
growth in the real estate, retail sales and retail investment markets as of
late. But does this mean long-term recovery is in the cards for the region as a
Smart Business spoke with
John M. Leonard, first vice president and regional manager of the Atlanta
office of Marcus & Millichap Real
Estate Investment Services, to learn more.
In light of the holiday
season and the steadily improving commercial real estate market, what are your
predictions for retail sales and the retail investment market?
Nationwide, core retail sales
fell steeply between mid-2008 and mid-2009 but have since staged a recovery to
pre-recession levels, with further gains anticipated through the holidays.
While sales have surpassed previous peak levels, nearly one-third of the
recovered gains have come from e-commerce. Since the trough in monthly retail
sales in December 2008, online retail sales climbed nearly $5.6 billion at the
expense of many traditional retailers. Drugstores, grocery stores, and
restaurants and bars also account for outsized shares of the increase, while
clothing stores, building supply dealers and furniture retailers posted the
Having reached a high of 10.3
percent nationwide in the first quarter of 2010, U.S. retail vacancies are
starting to decline, albeit modestly. They currently stand at 10.2 percent.
Effective rents are starting to firm as well. The drop in vacancy is expected
to accelerate over the next 18 months, and effective-rent growth will occur as
early as spring 2011. Per-square-foot pricing would follow a similar pattern.
One concern, however, is whether the retail recovery this time will be as rapid
and prolonged as previous recoveries. The lack of any significant job and
income growth suggest that this time, it may be a slower recovery.
How have growth in
e-commerce and the fallout from the recession impacted consumers and retailers?
The recession has given way
to a structural shift in shopping behavior that could change the retail landscape
for years to come. As job losses mounted and budgets tightened, consumers
became more price-conscious, and many discovered lower-price alternatives, such
as discount chains and online stores. As the economic recovery gains momentum,
consumers may have little incentive to revert to previous shopping habits.
While major discount chains will continue to expand, more mom-and-pop
retailers, which have already lost sizable market share, will be pushed to the
edge. Marginal chains and those that fail to offer a competitive advantage to
brick-and-mortar powerhouses or Internet-based services, such as movie rental
chains or music stores, will also face steep challenges.
How will this holiday
season impact retailers and retail building owners?
Forecasts call for a 2.5
percent to 3.0 percent gain in holiday spending this year, up from a modest
increase in 2009 and a decline in 2008. Strengthening consumption trends
advanced GDP growth to 2.5 percent in the third quarter, a positive trend for
retailers. Optimistic consumer surveys support improved holiday retail sales;
however, web-based shopping was expected to account for a significant share of
the increase. Black Friday also competed with Cyber Monday for top gains this
year, and the outcome could be an important signal for retailer trends as the
Shifting shopping habits and
a choppy start to the recovery have given way to changes in the retail
landscape. This year, major national retailers have increased their pop-up
store counts significantly, with Toys R Us now operating 600 temporary
locations, up from 90 stores in 2009. The addition of national chains to the
pop-up store roster has considerably expanded this retail niche, which was once
dominated by bare-bones operations selling seasonal wares. Retailers are taking
advantage of opportunities to pick up space in desirable shopping centers and
malls that may have been cost-prohibitive just a few years ago. Though pop-up
stores will not drive a recovery in property operations alone, they should help
pad NOIs through this holiday season and may ultimately lead to some
This holiday season will be
better than the last few, but it will likely take several more quarters for
consumers to entirely shake off the effects of the recession. During the third
quarter, retail vacancy retreated 10 basis points to 10.2 percent, the first
decline recorded since mid-2005. Nonetheless, the vacancy rate remains near its
highest level in approximately 18 years and will likely fluctuate in the near
term as employment growth returns slowly. While the retail sector should post
improvements in late 2011 as economic growth accelerates, meaningful gains in
occupancy and rents remain unlikely until 2012.
In addition to this
positive short-term news, which specific segments of the retail property sector
are expected to perform well in 2011?
properties with national-credit retailers will remain the most sought-after
deals as high-net worth individuals and well-funded REITs compete for
acquisitions. Unimpressive returns offered by alternative investments and
ongoing stock market uncertainty continue to heighten private buyers’ appetite
for low-risk, corporate-backed assets. Cap rates for these deals have already compressed
50 basis points this year. Yields will tighten further in 2011 but should
stabilize by midyear as returns approach pre-recession levels. Lower cap rates
and a shortage of high-quality assets listed will expand acquisition targets
for many buyers, and properties leased to well-known franchisees will garner
more attention and clear the market faster. Cap rates for these assets will
average 50 basis points to 150 basis points above those for best-in-class
investment-grade deals, depending on the financial strength of the guarantor.
Looking ahead, new accounting
standards proposed by the Financial Accounting Standards Board could impact the
single-tenant sector significantly by requiring lease liabilities to be
accounted for on corporate balance sheets. FASB is expected to issue a draft of
their proposed rules by early 2011.There will be a comment period, and then
FASB is expected to issue their final rules in late 2011, for an effective date
of 2012 or 2013. If approved, the
standards would likely influence businesses’ decisions to buy or lease real
John M. Leonard is a first
vice president and regional manager of the Atlanta office of Marcus &
Millichap Real Estate Investment Services. Contact him at firstname.lastname@example.org
or (678) 808-2700.