Retail R.E. In Dire Straits; C&W Predicts Worst Yet to Come

The retail market took a beating in 2008 and with the ongoing recession and anticipation of further job loss, the United States retail property sector is in for more trouble, according to a new report by Cushman & Wakefield’s Retail Industry Group.  Last year, a bevy of leading retailers either shut the doors of many locations or closed shop altogether, leaving an overabundance of space left on the market. Discount chains, drugstores and wholesale clubs are really the only retail businesses that are expanding, but their growth can account for only so much absorption. “Mervyns leases went to auction, and Kohl’s and Forever 21 took some of those properties, but not all,” Richard Latella (pictured), senior managing director of C&W’s Retail Industry Group, told CPN. “I think it’s going to be a protracted lease-up period. It will be difficult to fill up a lot of that space soon.” Overall, vacancy rates across the country will continue to increase, especially in areas where the decline of the housing market has been most extreme, like Florida, Arizona and Nevada. “Vacancies could reach as high as 14 percent,” Latella said. “We’ve seen some pessimistic reports; we will see a 100 basis point rise this year, easily.” While the decrease in new supply, concessions and more favorable lease terms will eventually help adjust the large gap between supply and demand, some properties could end up vacant for the long term. “Discounters who are leasing can pick and choose opportunities, so the Class C market has been passed over and a lot of that space will be considered obsolete,” he said. “Tertiary locations and Class C properties in metropolitan locations may not ever get used. Americans love to shop, so by that measure alone, there’s probably a lot of excess shopping inventory in the U.S.” On the valuation side of the retail property sector, given the credit crunch and the great disparity in pricing by buyers and sellers, the numbers are equally discouraging. Citing research from Real Capital Analytics, the C&W report notes that retail investment activity plummeted 72 percent in 2008 to $19 billion. “As appraisers and analysts, we’re all having a difficult time figuring out valuations in this market because there are so few sales,” Latella said. “For analysts who look to the market to see what buyers and sellers are doing, it’s a challenge. And some of these transactions that are occurring are in distressed situations, which makes it even more difficult.” While fundamentals are expected to get worse before they get better, real estate insiders believe the retail sector will reinvent itself, according to the report. Retailers will continue to favor leasing over building anew and property owners will focus on improving their existing assets, thereby regulating vacancy losses, and eventually, putting some owners in a more competitive position once the market goes on the upswing.