Marcus & Millichap’s Outlook Paints Promising, Complex Picture at RECon

Retail real estate and the economy at large offer a refreshingly promising picture these days, but decision-makers who ignore changed conditions and potential pitfalls do so out their own risk. That might well sum up the consensus of the panel of experts assembled in Las Vegas Monday afternoon by Marcus & Millichap Real Estate Investment Services Inc. for the firm’s annual economic and retail outlook.

May 26, 2010
By Paul Rosta, Senior Associate Editor

Courtesy Flickr Creative Commons user katutaide

Retail real estate and the economy at large offer a refreshingly promising picture these days, but decision-makers who ignore changed conditions and potential pitfalls do so at their own risk. That might well sum up the consensus of the panel of experts assembled in Las Vegas Monday afternoon by Marcus & Millichap Real Estate Investment Services Inc. for the firm’s annual economic and retail outlook.

The event took place at the Renaissance Las Vegas Hotel, a few hundred yards from the Las Vegas Convention Center, where the International Council of Shopping Centers’ annual RECon retail real estate convention concluded Tuesday afternoon.

In a lively overview often marked by humor, Marcus & Millichap head of research Hessam Nadji said he was encouraged by signs of the job growth that are essential for recovery. “Job growth is just beginning to bloom,” he said. He noted that the economy has added about half a million jobs so far this year.

Also telling is the addition of 330,000 temporary jobs in the past seven months, many of them in professional services. Nadji interpreted that figure in particular as a tipoff of growing corporate confidence and private-sector expansion. Indicators in the retail sector are stabilizing, too; store closures and vacancy increases continue to slow. Nadji also cited the rebound of retail REITs, which followed a 75 percent drop in market valuation with a 140 percent increase. That performance edged out that of both the Standard & Poor’s 500 and all REITs.

But Nadji called the audience’s attention to several causes for concern. Departing from the views of many other economists, he suggested that the recovery began only in the first quarter, rather than last fall. Moreover, the recovery still needs to prove that it can move forward on its own power once the federal government takes off the financial training wheels.

Regarding the Greek debt crisis, Nadji warned against brushing off that country’s problems as insignificant to the U.S. “We need to take this very seriously,” he said, reminding his listeners that the sub-prime mortgage crisis also began as an apparently insignificant issue. But it is the size of debt here in the U.S. that Nadji called “the giant elephant in the room.” Household debt is at 100 percent of gross domestic product and government debt hits 90 percent of GDP, he noted, and at some point a reckoning awaits. Still, Nadji offered a major bright spot: the historical lesson that debt-heavy conditions in the U.S. are eventually eased by economic prosperity.

Following Nadji’s presentation, several leading retail executives painted a picture of conditions that are both mixed and markedly improved. During the past four to six months, the number of bids per property on the market has risen significantly—upwards of 20 for a high-quality assets, reported Bernard Haddigan, Marcus & Millichap managing director for retail and the panel’s moderator. Yet he also noted that real estate debt valued at $1.3 trillion is coming due by the end of 2013 and $3 trillion by 2017, and that eventually there must be a reckoning.

The executives agreed that financing far more available than it was at the beginning of the year, but chastened lenders are tightening their underwriting standards. “You certainly need significant pre-leasing with credit tenants,” said David Israel, a senior executive for Thor Equities L.L.C. “Multi-tenant deals are much easier to finance.” ”

For his part, Centro Properties Group CEO Michael Carroll said he was encouraged by the signs of revival in the CMBS market. “Ultimately it’s going to spur more equity and more trades going on as a result.”

On the development side, Cedars Shopping Centers Inc. CEO Leo Ullman reported modest activity. “The grocers are doing very, very well,” he noted. Those retailers are rolling out new, smaller prototype stores in the 50,000 to 75,000-square-foot range.