Commercial Real Estate Trends - Retail

Economists' Commentary: Commercial Real Estate Trends - Retail

January 15, 2009

By George Ratiu, Research Economist

Research Economist George Ratiu

With the economy in a recession and unemployment on the rise, consumer spending is dropping. Adding to the employment situation, the financial crisis on Wall Street over the last few months has limited business and consumer credit. Shocked by steep losses in the stock market and home equity declines, consumers have pulled back on spending, especially as the holiday shopping season rolled out.

Consumer spending declined 3.7 percent during the third quarter. This year's Black Friday saw very modest retail activity. Retail sales declined 1.8 percent in November, and dropped 4.5 percent year-over-year. Consequently, the retail sector is in a downward slide, with companies closing stores and trimming demand for space. Demand for retail space as measured by net absorption declined by 2.2 million square feet during the third quarter of this year, and is expected to drop by 8.8 million square feet in the fourth quarter.

Completions of new retail space have adjusted for decreased demand, but not at a fast enough pace. For the first three quarter of 2008 completions were only 3.6 million square feet lower than the same period in 2007. As a result, vacancy rates are moving up. The vacancy rate for retail in the fourth quarter is expected to reach 10.8 percent, 100 basis points higher than the third quarter's 9.8 percent. The vacancy rate is estimated to jump to 12.7 percent by the end of 2009.

Regionally, the landscape of the hardest hit markets is similar to last quarter. The Midwest is feeling the brunt of the decline in retail spending. At the top of the list, Detroit, MI has a vacancy rate of 18.7 percent for the fourth quarter of 2008. Columbus, OH is recording the second highest vacancy rate, at 17.2 percent, followed by Fort Worth, TX (15.6%), Indianapolis, IN (15.5%), and Dallas, TX (15.1%).

 

On the other hand, Southern California markets are posting continued improvements in vacancy rates compared with last quarter. For the fourth quarter of 2008, Orange County tops the list of lowest vacancy rates, at 3.8 percent. San Francisco, San Jose and Los Angeles are also markets with single-digit vacancy rates, at 3.8 percent, 4.8 percent and 5.8 percent, respectively.

Following the increase in vacancy rates and the number of store closings, average retail rent is expected to decline 4.2 percent in the fourth quarter of 2008. For the year, rent growth will likely post a 2.0 percent decrease, compared with a 3.2 percent gain for 2007.

The outlook for the first part of 2009 is somber. While gas prices have been declining, the economic recession is expected to lead to additional job losses. Furthermore, with the volatility in the financial markets continuing, consumer credit will continue to be scarce. Given these factors and the low level of consumer confidence, the retail sector will likely experience additional contraction.

 

Retail Estimated Vacancy Rates - 2008.Q4

Lowest

 

Highest

Orange County, CA

3.8%

Detroit, MI

18.7%

San Francisco, CA

3.8%

Columbus, OH

17.2%

Honolulu, HI

4.5%

Fort Worth, TX

15.6%

San Jose, CA

4.8%

Indianapolis, IN

15.5%

Long Island, NY

4.9%

Dallas, TX

15.1%

Los Angeles, CA

5.8%

Wilmington, DE

14.9%

Miami, FL

6.4%

Cleveland, OH

14.3%

Las Vegas, NV

6.6%

Kansas City, MO

13.9%

Ventura, CA

6.8%

Cincinnati, OH

13.2%

Baltimore, MD

7.0%

Houston, TX

13.0%

Source: NAR/TWR

 

 

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