Rising Food, Energy Costs Deliver Blows

The National Association of Realtors projected in its latest Commercial Real Estate Outlook that retail sector vacancy rates will rise from 9.7 percent in the second quarter of this year to 10.4 percent in the second quarter of 2009, as rising food and energy costs continue to impact consumer purchases. Average rents are expected to move accordingly, with growth shrinking from 3.2 percent last year to 1.2 percent this year and dropping by 0.9 percent next year. Yet net absorption, which totaled 11.1 million square feet in 2007, should turn negative this year as retailers suffer more in the second half of the year, with a year-end expected decrease of 2.6 million square feet, and then eke out a positive 2.8 million square feet next year.Property values are likely to decrease by between 15 and 18 percent by the end of this year and an additional 10 percent next year, according to a report from Zayan Finance titled, “Commercial Real Estate Performance Analysis: Despite Uncertainty, Market Fundamentals Rule.” The amount of these expected declines will vary considerably by market and product. Despite the less-than-rosy overall near-term outlook for the retail market, neighborhood and community centers will likely stay afloat, thanks to their food and health tenants. On the opposite end of the spectrum, regional malls, which tend to have more general merchandise and clothing tenants, may have a rough go of it, as consumers keep a closer eye on their discretionary spending. To that end, Zayan contends that the strongest investment opportunities are in neighborhood and community centers in major metropolitan areas in Southern California, Chicago, the Northeast and the Southeast. Moreover, the firm contends that retailers in discount merchandise, health products and grocery stores are projected to fare well despite weakened consumer confidence. Single-tenant properties net leased to drugstores and grocery stores are also projected to offer solid opportunities.