U.S. Retail Highlights – 3Q 2011

by CoyDavidson on November 2, 2011

Holiday Shopping May Surprise, But Retail Real Estate Faces Uncertain 2012

The national retail real estate sector will likely close 2011 much as it began: in a slow growth mode and with a wait-and-see attitude among investors, developers and retailers alike, according to Colliers International’s Third Quarter 2011 North America Retail Highlights report.

But as the holiday season approaches, total spending on consumer goods is likely to show a net positive through Q4, with recession-weary consumers–tired of “pinching pennies”–taking advantage of year-end sales and depleting bare-bones inventories.

The uptick, however, will likely be short-lived. Continuing an annual trend even during strong economic cycles, retail store closings of underperforming locations generally spike in the first quarter, and based on current indicators, that trend is likely to continue in Q1 2012.

Aside from strong performers, publicly traded companies, investors and retailers are likely to be conservative with their real estate plans until at least the middle of 2012. By then the overall economy will likely have defined itself as either being in a double-dip recession or beginning to stabilize, or even improve.

According to the report, the Q3 national retail real estate vacancy rate was flat quarter-over-quarter, at 10.8 percent, a rate that has experienced little variation over the past eight quarters. Healthier retail markets include New York City, Washington, DC, San Francisco and Seattle, while Phoenix, Detroit, Atlanta and Las Vegas continue to experience vacancy rates at or above 15 percent.

On a positive note, absorption increased nearly nine-fold quarter-over-quarter, to 5.1 million square feet, the nation’s highest level in more than two years. In addition, approximately three-quarters of the 60 retail markets Colliers International tracks recorded positive absorption year-to-date, led by Denver (+1.2 million square feet), Houston (+749,000 square feet) and Greenville/Spartanburg (+623,000 square feet).

Of the gainers, most markets increased occupied space by less than 100,000 square feet; small increases overall but still extending positive absorption trends from 2010. Louisville, Chicago, Dallas-Fort Worth and Orange County are among the markets that have reversed 2010 negative absorption, tracking positive year-to-date.

Meanwhile, new construction nearly doubled quarter-over-quarter, to 8.2 million square feet, although these figures are still substantially below pre-recession levels. Leasing activity is still moderate, with average asking rents essentially flat, at $15.52 per square foot.

One of the quarter’s biggest stories was Borders’ liquidation of its remaining 399 stores, with an estimated $1 billion+ in lease obligations. The stores, many in “A” locations, caught the eye of more than a dozen interested parties including Barnes & Noble and Books-A-Million (which purchased 14 Borders leases), college bookstores, grocers, hhgregg, Ross and luxury discounters. Landlords face significantly tougher economics, often having to backfill these vacated spaces with replacement retailers paying as much as 40 to 50 percent less in rent, as Borders’ pricier build-outs had driven up occupancy costs no longer sustainable in the current market.

“We remain in a complex operating environment, and reflecting the overall economy, retail real estate will face near-term challenges and may even see some further contraction,” said Dylan Taylor, chief executive officer for Colliers International in the U.S. “But there is pent-up demand for quality assets with consumers eager to resume strong spending habits. Once the overall market stabilizes, the retail sector is poised for a strong rebound.”

“We may experience a better-than-expected Holiday season to end 2011, but we will likely see a relatively flat market overall in 2012,” said Ann Natunewicz, national manager of retail research for Colliers International. “As the economy struggles to regain its footing, the retail sector will adjust accordingly.”

Additional highlights from the full research report, which analyzed the sixty largest retail markets in the nation, are listed below:

Luxury remains the savior of retail, both full-price and outlet. High-end retailers such as Saks Fifth Avenue and others have returned to focus on their core loyal shoppers, and increasingly look to growth in their outlet programs to sustain profitability.

Chain drugstore growth continues to be driven by the needs of an aging population. Interestingly, the five states with the highest chain drugstore count per capita are all located in the Northeast and Mid-Atlantic (Rhode Island, Delaware, Massachusetts, New Hampshire and West Virginia, plus the District of Columbia), rather than in traditional retirement capitals such as Florida, Arizona and North Carolina.

Though grocery-anchored projects (and the steady traffic generated) have typically been viewed as stable, recession-proof assets, the segment may consolidate in the coming years.

Barnes & Noble, JCPenney, Dunkin’ Brands, BJ’s Wholesale, 99 Cents Only, and Sur La Table were among retailers that recently received an infusion of capital.

Additional data and research are available in the full report below.

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