Forget any talk of consumers cutting back on shopping during the 2012 holiday season. Not only did people buy gifts, but they also bought other items throughout the year. Meanwhile, the jobs and wages picture improved, and there was a slowdown in shopping center construction. Those factors, industry experts say, are making the retail sector a bright spot in commercial real estate.
According to CBRE Econometric Advisors, in the fourth quarter of 2012, retail market fundamentals improved. The national availability rate reached 12.8%, compared to 13.1% for the fourth quarter of 2011. The firm, in its U.S. Retail Market Overview report, also noted that according to Moody's, retail spending increased 0.5% in December 2012, which exceeded expectations.
‘It is certainly looking up compared to where we were in the recession,’ says Abby Rosenbaum, senior economist at CBRE Econometric Advisors. ‘We are talking about recovery, but it is still muted.’
Rosenbaum notes that retailers are benefiting from pent-up demand, as consumers are eager to shop again after limiting their spending during the recession. Still, retailers are not building many new stores because they do not want to expand too rapidly.
‘There was certainly expansion going on right up until the recession, and that did hurt the retailers,’ Rosenbaum says. ‘It was as if the momentum they were seeing was going to continue, but, in most cases, that did not happen. Now they are recognizing that.’
The retail sector has seen six consecutive quarters of positive absorption. It helped that construction has slowed, says Kevin Randles, senior vice president of CBRE Capital Markets in Sacramento, Calif.
‘What we are seeing now is a lack of deliveries,’ he says. ‘In 2012, retail property deliveries nationwide declined to less than 10 million square feet. With further declines in deliveries in 2013, rental rates are forecasted to begin an upward trend that may last for some time.’
Randles adds that by comparison, at the market peak in 2004, 216 million square feet of retail space was delivered.
Another factor that will help retail is improved job growth. According to the U.S. Bureau of Labor Statistics, in February, the unemployment rate had dropped to 7.7%, and over the year, average hourly earnings rose 2.1%. Commercial lenders are still cautious, but they are interested in low risk deals.
‘If you have a good quality neighborhood center that is well occupied, there are plenty of lenders,’ Randles says.
Joe McBride, a research analyst at New York-based Trepp LLC, says new issuance and new origination of retail loans are picking up. However, he says, there is a pipeline of distressed retail assets.
‘A lot of the loans were originated in '06 and '07 during the bubble, and we need to get through all those distressed assets before we get a good sense of where we will go from here,’ he says. ‘They need to be either modified, restructured or disposed of with a loss.’
According to Trepp, the retail commercial mortgage-backed securities delinquency rate increased slightly in January, to 7.8%, after several months of small decreases. That is lower than office, at 10.5%, multifamily, at 13.4%, and lodging, at 11.4%.
Retail has another challenge. ‘The future of brick-and-mortar retail in general is going to be tough,’ McBride says. ‘If you were a bank or other originator, it's hard to pledge money when you look at JCPenney and Blockbuster and Borders.’
E-commerce continues to affect these and other retailers, and some are adapting. ‘I don't think the retail center is going away, but it has to transform,’ Rosenbaum says. ‘Online shopping does impact the way retailers do business now. There is something to be said about consumers experiencing shopping.’
Rosenbaum adds that some retailers are building smaller stores and letting the physical store act as a showroom for people who will buy the items from the store's website.
Another way that retail has transformed is by partnering with hotel companies to create mixed-use centers.
‘There are great synergies at play,’ says Guy Maisnik, vice chairman of the Global Hospitality Group for law firm Jeffer Mangels Butler & Mitchellin Los Angeles. ‘Shopping continues to be one of the preferred activities for travelers.’
International travelers are especially attractive, as they shop at luxury retailers in the U.S. to avoid tariffs and taxes that escalate prices of luxury goods in their home countries. Maisnik adds that these opportunities are not just for upscale retailers.
‘The key is that the hotel can bring to the shopping center new customers every two days from outside the trade area,’ Maisnik says. ‘Hotel customers spend more than they do at home.’
Nora Caley is a Denver-based freelance writer. She can be reached at firstname.lastname@example.org.