Commercial Investment Trends: Retail Sector Struggles with Growing Distressed Sales

Commercial Investment Trends: Retail Sector Struggles with Growing Distressed Sales

July 20, 2009

By George Ratiu, Research Economist

Consumer spending continues to decline, as rising unemployment and a prolonged recession force consumers to cut back. Consumer credit also declined 1.5 percent in May of this year, with revolving credit leading the decline. The downward trend has been troublesome for retail stores still struggling with inventories and low traffic. The twin problem of low consumer spending and outstanding debt led to the bankruptcy filing of Eddie Bauer in June.

Against this backdrop, demand for retail space has been contracting, pushing vacancy rates to 12.0 percent and depressing rent. Compounding the problem, due to the generalized inability to refinance existing debt, the number of distressed properties coming on the market has been on the rise.

For the first quarter of the year, investments in retail properties were down 72 percent compared with the same period in 2008. Transaction volume reached only $1.9 billion during the quarter. This stood in even sharper contrast to the market peak, when $19.0 billion in deals were recorded during the first quarter 2007. The market continued its decline during the second quarter as well—May posted a 12 percent decrease in the dollar volume of sales from April, with 29 major properties trading hands for a total of only $503 million.

Overall, the number of transactions is low, particularly for mall properties. During the first quarter 2009, only 76 mall properties were traded, compared with 42 strip center deals. Pricing for retail transactions has been on a steep downward path. Retail prices range from about $25 per square foot for regional malls to $159 per square foot for strip centers, and $658 per squarefoot for urban properties. Average cap rates have moved up and down over this period, with recent deals averaging 7.3 percent.

Regionally, on a year-over-year basis, the greatest declines in retail transactions were seen in the following markets:

  • The Midwest down 94 percent
  • The Southwest down 88 percent
  • The Mid-Atlantic down 76 percent
  • The West down 66 percent
  • The Southeast down 51 percent
  • The Northeast down 49 percent

Across the country, there were 11 primary and secondary markets with transaction declines of 100 percent, including Kansas City, St. Louis, Jacksonville, Miami, Memphis, San Francisco and Las Vegas. Even so, a few markets posted increases in the volume of investments during the first quarter compared with a year ago, although on a small number of transactions. Westchester was up 56 percent, and Orange County, CA posted a 53 percent rise, while Cincinnati was up 6 percent.


Distressed retail sales are on the rise. April 2009 provided a record $19.5 billion in distressed properties, mostly due to General Growth Properties’ bankruptcy. By June of this year, there were 525 major retail properties that became distressed during 2009, totaling $17.8 billion. When counting distressed properties from 2008 as well, the total reaches 1,420 retail buildings worth $31.2 billion. In fact, retail leads the list of commercial properties with the highest volume of distress.


Looking at retail distress by lender type, a significant 57 percent resides in CMBS, with another 14 percent held by international and national banks.


Analyzing the buyer composition for retail space, private investors gained the largest share in the low-volume environment. As of the first quarter 2009, private investors accounted for 67 percent of acquisitions, higher than the same period a year ago. Meanwhile, public investors accounted for 11 percent of retail buyers, followed by user buyers, at eight percent. Institutional investors posted the largest drop in share, from 23 percent of the market in the first quarter 2008 to only five percent during the same quarter in 2009.

 


The top retail buyers so far in 2009 include:

 

By Value of Transactions

By Number Transactions

Inland Real Estate Group

Inland Real Estate Group

Charter Holdings

Walgreen Co

Tanger Factory Outlet

Cole Real Estate Investments

Cole Real Estate Investments

Kroger Inc

Acadia Realty Trust

PI Properties


Considering the performance of retail properties this year and the low level of investment activity, it is likely that the market will continue sliding. With unemployment expected to maintain the upswing during the second half of the year and the volume of distressed properties rising, prices are likely to continue falling. With financing still a major obstacle for investors, the pace of sales is likely to remain slow over the second and third quarter.

 

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