Retail Sales Trends

Economists' Commentary: Retail Sales Trends

April 21, 2010Research Economist George Ratiu

By George Ratiu, Research Economist

 

With the economy finding its footing in the second half of 2009 and consumers maintaining a cautious approach to retail spending, the year proved challenging for retail investments. In 2009, retail investments totaled $11.6 billion, a 44 percent drop from 2008. There were 883 properties that exchanged hands during the year, representing a 56 percent decline year-over-year.
The end of the year brought a positive development—the fourth quarter sales volume jumped significantly, totaling approximately half of the 2009 volume. In fact, the fourth quarter gain was the largest since the second quarter 2008. Sales for the quarter amounted to $6.2 billion, largely concentrated in strip centers. From a broader perspective however, the quarter’s performance was not strong enough to overcome the low volume of sales recorded throughout the year.

Another encouraging sign was that, while overall sales were down for the year, on a quarterly basis, retail transaction volume steadily improved throughout 2009. From $2.2 billion in sales during the first and second quarters of the year, the volume of properties sold reached $2.5 billion in the third quarter and $6.2 by the fourth quarter. Mall properties mirrored the advance of the sector, while strip centers declined for three quarters, only to register a 280 percent jump in sales volume from the third to the fourth quarters.

It is worth noting that a large part of the sales activity was driven by a more quickly narrowing gap between buyers and sellers. Unlike the other property types, retail spaces have provided for a broader consensus on values between buyers and sellers. Given the large amount of overhang, sellers were more willing to ask lower prices, a fact evidenced by the quarterly data. From an average of $152 per square foot in the first quarter, prices declined to an average of $135 per square foot in the fourth quarter. Over this period, the decline was more pronounced for strip properties (down 13%) than for mall space (down 11%).

Cap rates for retail properties have been on an upward trend for 10 quarters. Average cap rates breached 8.0 percent by the third quarter of the year and hit 9.2 percent for strip properties. On a yearly basis, cap rates rose by 75 basis points in 2009. Look at prices from a historical perspective, retail prices have returned to the same levels they were in 2004.

Sales of strip centers totaled $6.8 billion in 2009, a 36 percent decline over the previous year. There were 420 strip properties that traded hands over this period. For the year, the average price per square foot was $133, a decline of 23 percent year-over-year. At the same time, cap rates rose steadily throughout the year, averaging 8.2 percent. Compared with 2008, warehouse cap rates increased about 97 basis points in 2009.

Mall sales accounted for roughly 44 percent of retail transactions. The volume of mall transactions reached $4.8 billion in 2009, a 52 percent decline from 2008. Unlike strip sales which declined for three quarters only to jump in the fourth, transactions of mall buildings were on a steady upward path throughout last year. Sellers of mall properties found an environment where the threat of distressed assets and buyer expectations pushed prices lower. The average price per square foot in 2009 for mall space was $168, 26 percent lower than the previous year. Cap rates for mall buildings averaged 7.5 percent in 2009, a 95 basis point increase year-over-year.

While the threat of a large volume of distressed retail space emerging loomed throughout 2009, there were only a small number of sales which materialized. In the fourth quarter, only 10 percent of all sales consisted of distressed properties. Lenders have been avoiding foreclosing on retail properties, choosing instead to either extend existing loans or modify them. Based on available data, about $43 billion of retail properties have entered into some form of distress. Of those, only $1.6 billion have been resolved, translating into the lowest recovery rate of any property type.

The regional investment performance of retail markets provided positive signs. In 2009, there were 15 metro areas that recorded positive year-over-year changes in sales volume. Retail sales volume in the DC-Maryland suburbs rose 151 percent in 2009, totaling $227 million. Orange County, CA also posted triple-digit increases in sales volume, reaching $311 million. Several Mid-Atlantic and Western metros had sales growth, including Philadelphia (up 80%), Baltimore (up 5%), Salt Lake City (up 28%), Portland (up 23%), and San Diego (up 21%).
In terms of size, most metro areas remained below the $500 million mark. Denver was the only city to exceed that level, with $523 million in retail sales in 2009. Ft. Lauderdale and Los Angeles rounded the top three markets, with $396 million and $313 million in sales, respectively. The other top markets by volume were the Atlanta ($353M), DC-Virginia suburbs ($349M), Dallas ($329M) and Chicago ($313M).

On a year-over-year basis, the declines in regional retail transactions were considerably more uneven. Centered around a strong retail market in the DC region, the Mid-Atlantic proved more resilient. Meanwhile, the Midwest mirrored declining economic conditions in its metro areas. The ranking of changes in sales volume across the six major regions illustrated this fact:

  • The Midwest down 70 percent
  • The Northeast down 57 percent
  • The Southeast down 45 percent
  • The Southwest down 39 percent
  • The West down 34 percent
  • The Mid-Atlantic down 8 percent

Looking at the buyer composition for retail space, with low sales volume and lack of available financing, private investors were not as dominant in the market as in 2008. Public and Institutional investors accounted for increasing acquisition shares. Equity and international investors were much less active in the market during 2009.

The top retail sales in 2009 by price:


Looking at sales data for the first couple of months in 2010, sales have subsided after the fourth quarter buzz. In January and February, 60 major properties traded hands for a total of $890 million. Of those, 35 buildings were strip centers with the remaining consisting of mall spaces.

Based upon the performance of retail investments in 2009, and the improvement in consumer retail spending in the first quarter of this year, the expectations are for a rebound in 2010. However, unemployment continues to cast a long shadow over the economy and financing is still the main challenge for investors.

 


 

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