Retail across USA in the dumps

The nation's retail market posted negative quarterly net absorption for the first time, along with the highest vacancy and availability rates, since CoStar Group began tracking retail trends in 2000, according to the Bethesda, MD-based company's first-quarter 2009 retail review and forecast. On the heels of the release of CoStar's First Quarter 2009 National Retail Report, Senior Director of Research and Analytics Jay Spivey conducted a webinar titled "The State of the Commercial Real Estate Industry: 1st Quarter 2009 Retail Review," on April 17. Spivey noted that quarterly retail leasing activity has dropped off about 9 million square feet over the last two quarters, leading to 24 million square feet of negative net absorption and a 7.2% total vacancy rate recorded during first quarter. Retail space listed as "available" for lease (which could be vacant or occupied) has been rising at an increasing rate. Since the start of the recession, 697 million square feet of available retail space has been added to the market, Spivey showed. This level of availability may be a more realistic indicator of the state of the market than vacancy, said Spivey. Specifically, retail space availability has increased a staggering 1,280 basis points to 19.4% since second-quarter 2006, while the vacancy rate has increased only 120 basis points over the same period. Supporting the build-up of available retail space, CoStar's research shows that the average days a retail space is listed on the market as "available for lease" has continued to rise -- from 174 days in first-quarter 2006 to 370 days in first-quarter 2009. Landlords have only recently showed a definitive response to the down market by lowering asking rental rates. The average rental rate has declined from $17.64 per square foot in second-quarter 2008 to $17.51 per square foot at the close of first quarter. To demonstrate the impact retailers closing large amounts of stores can have on retail real estate fundamentals, Spivey used Circuit City's closure of 567 stores as an example. As Circuit City was typically an anchor tenant at community or power shopping centers, CoStar found that the average vacancy rate at shopping centers where Circuit City occupied space has shot up to 22.2%, while average asking rental rates have lowered from a high of nearly $25 to a low of about $21 per square foot. If that's not enough pressure on those landlords, Spivey pointed out co-tenancy issues may arise, causing additional vacancy at these centers. For example, CoStar found that Verizon Wireless is a co-tenant in 192 of 388 Circuit City shopping centers. Aside from retailers closing stores and a lack of retailers opening new stores, Spivey showed that retail real estate is feeling more pain during this recession due to excess inventory. In the past 15 years, 510 million square feet of retail space has delivered, accounting for 7% of total retail square footage. The good news is that developers have backed off, showing a downward trend in deliveries since 2006, said Spivey. So far in 2009, Spivey said 895 retail buildings totaling 23.5 million square feet have delivered and this new space is about 67% leased. Developers have lowered the average asking lease rate on these new buildings from their peak by about 7% to try to keep leasing momentum going. Currently, there is about 82 million square feet of retail space under construction, but square footage scheduled to deliver this year will cause only about a 0.6% addition to the total retail market, Spivey said. These under-construction properties are currently 57% leased and to attract new tenants, developers have responded by lowering the average asking lease rate a hefty 29% from a peak of $37.74 per square foot, he added. The Westchester, Northern New Jersey, and Dallas markets were identified as having the most retail square footage under construction as a percentage of total inventory. Benchmarking new retail space deliveries against absorption levels, Spivey identified Los Angeles and Atlanta as having more excess retail inventory than any other markets. For more regional leasing trends, follow this link. To put the U.S. retail real estate market in perspective, Spivey said that average retail building was built in 1968 and is 15,568 square feet. Further supporting the role small retail centers play, Spivey said that only 3% of retail buildings in the U.S. are 100,000 square feet or larger, but these buildings account for 39% of total retail space. Spivey then broke down retail leasing trends by property type. For more on that, follow this link. Unfortunately, CoStar is forecasting that the retail vacancy rate will continue to climb, surpassing 9% sometime in the next year, said Spivey. Additionally, negative absorption nearing 100 million square feet is expected against a backdrop of about 125 million square feet of new retail space and continually declining rents. For more information see www.houstonrealtyadvisors.com