Despite Spring Thaw, Harsh Forecasts Continue for Retail

The retail sector’s current distress will eventually provide ample opportunities for investors and retailers. But the slight spring thaw in consumer attitudes about retail will not be enough to prevent harsh conditions for the rest of the year, according to multiple national assessments of the retail sector published during the past week. “Though contraction will be the harsh reality for most, the strongest concepts will benefit, not only from the elimination of their competition, but from the best tenant’s market in decades,” Colliers International’s spring survey concludes. On the other hand, recent indicators of improving consumer confidence are still a long way from restoring the market. The recession has dug a deep hole that the nation’s retailers and retail real estate industry will not be able to fill to any extent until at least next year. As Cushman & Wakefield Inc.’s report points out, 130 million square feet of retail space has gone dark nationwide since the start of the recession. Of 42 markets surveyed by Colliers, 36 reported negative net absorption during the first quarter, including five that registered more than 600,000 square feet of negative absorption. The few markets that have relatively low vacancy levels have benefited from relatively low development. Little new supply is coming the market; nationwide, the retail sector added only 6 million square feet of inventory during the first quarter in the 42 top markets tracked by Colliers, and 11.6 million square feet is under construction in those markets. Detailing the daunting environment, Colliers predicts that retail center values will ultimately slip 30 percent from the 2006 peak of market pricing, and up to 50 percent for troubled properties in weak markets. In the absence of a healthy credit market, other retailers are bound to join the roster of bankrupt chains that so far includes Levitz, Linens ‘n Things, Steve & Barry’s, Circuit City and Gottschalk’s. Since minimal capital is available for reorganization, the Colliers report asserts, “Chapter 11 reorganization has become little more than a delaying action before total liquidation.” Distressed assets will eventually increase investment sales activity, which dropped 72 percent in 2008. Yet the complicated nature of bankruptcy filings may put the lion’s share of assets on the market later than some investors expect. “Expect to see a one- to two-year time frame from the initial default on a loan to the marketing of that asset–meaning defaults that occur within the next three years won’t go up for sale until 2010 to 2014,” says Jim Khoury, managing director for Jones Lang LaSalle Inc., in a spring retail overview published by the firm.