Retail Investment

Economists' Commentary: Retail Investment

March 19, 2009

By George Ratiu, Research Economist

The retail sector is in contraction, fueled by the recession, mounting job losses and a sharp drop in consumer spending. Retail businesses are scaling back operations, closing stores and trimming demand for space. Adding to the situation, some retail companies-like Circuit City-are filing for bankruptcy and closing stores. With rising vacancies, declining rent growth and debt maturities looming, investors are on the sidelines.

The wait-and-see attitude was amply illustrated by the 2008 investment volume-at $19.4 billion, the lowest of the four core property types. On a yearly basis, the 2008 retail transaction volume dropped 74 percent from 2007. Transaction numbers were down 60 percent, at 1,649 property sales. Average cap rates moved up 60 basis points through the year, accelerating in the fourth quarter. Meanwhile, prices entered negative territory.

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

  • The Mid-Atlantic down 80.1 percent
  • The Southeast down 79.6 percent
  • The West down 69.2 percent
  • The Midwest down 66.4 percent
  • The Southwest down 66.1 percent
  • The Northeast down 54.9 percent

Comparing the two retail property types-strip centers and mall/other properties-reveals similar declines. During 2008, $10.4 billion of strip centers traded hands. The figure represents a 76 percent decline year-over-year. In addition, the number of strip property transactions also fell 72 percent, to 699. For the better part of the year, the number of strip centers offered for sale exceeded the number of deals closed. Pricing rose through the early part of 2008, but dropped in the last quarter, to settle on a two percent rise for the year. Looking at strip centers nationally, only one market avoided the decline in investment-San Jose, CA, which at $204 million in 2008 transactions was even with the 2007 volume. On the flip side, DC posted a 100 percent drop in transaction volume, followed by Pittsburgh (-95%), Columbus (-94%), and Tampa (-92%).

Mall and other retail property investments fell at a comparable rate during 2008-71 percent, with a total volume for the year of $9.0 billion. The number of mall and other properties traded fell 42 percent, to 950. The regional mall fared the worst in the year's investment activity-only 20 properties traded hands in 2008, for a total value of $1 billion. The average price per square foot recorded the same two percent increase for the year as the strip centers. Urban mall properties witnessed a strong start to the year, but by the end of 2008, affluent customers and foreign tourists alike put the brakes on spending, leading to declines in the malls' performance and investment attractiveness. Regionally, there were a few metro areas that attracted an elevated pace of mall investment activity in 2008. Chicago witnessed a 100 percent jump in the volume of investments during the year. The second highest rise in mall investment volume occurred in Las Vegas, where $335 million exchanged hands during the year, an 82 percent increase. Other metros with positive changes in investment volume were Charlotte (19%), Jacksonville (17%), Manhattan (9%), and DC/Maryland suburbs (7%).

 

 

Judging by volume of retail investments, Chicago took the top spot in 2008, with $1.7 billion in sales. The second market by volume was Manhattan, with $1.3 billion in retail transactions. Underscoring the change in the economy, these were the only two markets to post over $1 billion in retail investment during 2008, compared with 15 markets in 2007. The other markets rounding the top five by investment volume were Los Angeles ($744 million), Houston ($707 million) and Atlanta ($561 million).

Considering the buyer composition for retail space, foreign investment dropped by 99 percent on a yearly basis. Public and equity investors also pulled back investments by 93 percent and 75 percent, respectively. Consequently, the retail market has undergone shifts in market share. Private and institutional investors gained the most market share, with increases of 10 percent and 7 percent, respectively.

RETAIL BUYER COMPOSITION

 

The top retail deals of 2008 include:

  • 666 Fifth (Retail Condo), New York, NY (Mall/Other) - $525.0 million
  • Westfield North Bridge, Chicago, IL (Mall/Other) - $515.0 million
  • 730 N Michigan Ave, Chicago, IL (Mall/Other) - $350.0 million
  • Shoppes at The Palazzo, Las Vegas, NV (Mall/Other) - $290.8 million
  • Bay Street Emeryville, Emeryville, CA (Strip) - $234.0 million

The retail sector's performance in 2008 left investors wondering what 2009 will bring. Based on the fundamentals, the year ahead is not likely to bring much good news. While retail completions in 2008 were down by nine percent compared with 2007, existing retail space continued to flood the market. In addition, net absorption of retail space continues to drop, and is forecasted to end 2009 at a negative 49.8 million square feet. With negative rent growth on the horizon, it remains to be seen what investors' appetite for retail space will be this year.

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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