CoStar's recently released Third Quarter 2009 National Retail Report (now available to all CoStar Property Professional subscribers and also available soon for non-CoStar subscribers) provides a detailed view of retail rental rates, vacancy, construction and sales activity across the major metropolitan areas CoStar tracks in the nation.

In this article, CoStar, drawing from statistics in the report, shines a spotlight on the country's "hottest" and "most challenged" retail real estate markets. Additionally, we called upon CoStar Retail Leasing Power Brokers in some of these markets to discuss the driving factors behind these rankings.

VACANCY RATES

With retailer bankruptcies, store closings and the massive slowdown in retailer expansions, increasing vacancy has plagued nearly every market during the recession, with the third-quarter national retail vacancy rate rising to 7.6%, up 120 basis points (bps) over third-quarter 2008. Note that CoStar's overall retail vacancy rate includes all types of retail buildings, from freestanding single-tenant retail buildings to super-regional shopping malls.

A number of metro markets stand out as either showing improvement in retail vacancy or suffering from the most dramatic increases in vacancy over the last year. Of the 63 retail markets that CoStar Group, Inc. tracks across the nation, only six have shown a year-over-year improvement in the average retail vacancy rate (third-quarter 2009 compared to third-quarter 2008). On the flip side, only six markets have shown an increase in the vacancy rate of 250bps or greater over the course of the last 12 months.

MARKETS SHOWING IMPROVEMENT IN THE RETAIL VACANCY RATE

• Memphis: 3Q 2009 8.9%, improvement of 112bps over the 3Q 2008 vacancy rate of 10%.


• Providence, RI: 3Q 2009 6.6%, improvement of 69bps over the 3Q 2008 vacancy rate of 7.3%.


• Long Island: 3Q 2009 4.6%, improvement of 56bps over the 3Q 2008 vacancy rate of 5.1%.


• New York City: 3Q 2009 2.5%, improvement of 53bps over the 3Q 2008 vacancy rate of 3.0%.


• Westchester / SO CT: 3Q 2009 6.7%, improvement of 51bps over the 3Q 2008 vacancy rate of 7.2%.


• Tulsa: 3Q 2009 7.6%, improvement of 14bps over the 3Q 2008 vacancy rate of 7.8%.

MARKETS SHOWING THE MOST SIGNIFICANT INCREASE IN THE RETAIL VACANCY RATE

• Phoenix: 3Q 2009 11.4%, increase of 297bps over the 3Q 2008 vacancy rate of 8.4%.


• Southwest Florida: 3Q 2009 8.5%, increase of 284bps over the 3Q 2008 vacancy rate of 5.7%.


• Sacramento: 3Q 2009 10.4%, increase of 274bps over the 3Q 2008 vacancy rate of 7.6%.


• Tucson: 3Q 2009 8.2%, increase of 264bps over the 3Q 2008 vacancy rate of 5.5%.


• Inland Empire: 3Q 2009 9.0%, increase of 263bps over the 3Q 2008 vacancy rate of 6.3%.


• Orlando: 3Q 2009 8.3%, increase of 258bps over the 3Q 2008 vacancy rate of 5.7%.

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RENTAL RATES

With many retailers challenged to cover occupancy costs at their stores and most landlords challenged to lease their available retail spaces and/or cover their debt service, defining fair-market rent has been a sore spot for retailers and landlords across the country.

However, statistics from CoStar's Third Quarter National Retail Report show that there has been at least a moderate meeting of the minds between retailers and landlords, which is reflected in the national average retail asking rental rate. With the caveat that landlords would like to have refrained from lowering their asking rental rates and perspective tenants would like to have asking rates lowered significantly, the national average asking retail rental rate (triple-net basis) came in at $16.94 per square foot (psf) at the close of the third quarter, down nearly 4% compared to the rate a year earlier.

Not every market is following this national trend. CoStar data shows that only 11 of the 63 major retail markets CoStar tracks recorded at least a minor increase in the average asking retail rental rate. On the flip side, nine markets have seen a decline in the asking retail rental rate of 9% or more.

MARKETS SHOWING AN INCREASE IN THE AVERAGE ASKING RETAIL RENTAL RATE
Note that with the exception of San Francisco, all of the markets showing an increase in rent have average asking rental rates that fall well below the national average retail rental rate. Six of these 11 markets have vacancy rates at or below the national average. However, an increase in the asking rental rate has certainly not helped vacancy in these markets -- all but Tulsa have recorded an increase in vacancy over the course of the last year.

• San Antonio: 3Q 2009 $15.47psf, up 4.4% over 3Q 2008.


• Cincinnati: 3Q 2009 $12.53psf, up 2.9% over 3Q 2008.


• Tulsa: 3Q 2009 $10.09psf, up 1.8% over 3Q 2008.


• San Francisco: 3Q 2009 $31.98psf, up 1.5% over 3Q 2008.


• Madison, WI: 3Q 2009 $13.38psf, up 1.2% over 3Q 2008.


• Raleigh / Durham: 3Q 2009 $16.39psf, up 1.3% over 3Q 2008.


• Dallas / Fort Worth: 3Q 2009 $14.51psf, up 0.9% over 3Q 2008.


• Birmingham, AL: 3Q 2009 $10.10psf, up 0.9% over 3Q 2008.


• West Michigan: 3Q 2009 $10.68psf, up 0.8% over 3Q 2008.


• Columbus, OH: 3Q 2009 $12.15psf, up 0.4% over 3Q 2008.


• Philadelphia: 3Q 2009 $15.12psf, up 0.2% over 3Q 2008.

MARKETS SHOWING A SIGNIFICANT DECREASE IN THE AVERAGE ASKING RETAIL RENTAL RATE
Note that following these significant decreases, six of the nine markets still have average asking retail rental rates well above the national average. Six of these nine markets have retail vacancy rates well above the national average and with the exception of Memphis, all have suffered an increase in the vacancy rate over last year ranging from 68bps to 284bps. That said, landlords in these markets have definitely responded to market conditions by lowering asking rents, and their efforts have hopefully helped to at least soften the below of vacancy rate increases that could have been worse.

• Memphis: 3Q 2009 $10.98psf, down 18.1% over 3Q 2008.


• Toledo, OH: 3Q 2009 $8.04psf, down 17.8% over 3Q 2008.


• East Bay/Oakland, CA: 3Q 2009 $24.88psf, down 13.8% over 3Q 2008.


• Seattle/Puget Sound: 3Q 2009 $19..96psf, down 11.8% over 3Q 2008.


• Southwest Florida: 3Q 2009 $17.31psf, down 10.2% over 3Q 2008.


• Las Vegas: 3Q 2009 $22.55psf, down 9.9% over 3Q 2008.


• Detroit: 3Q 2009 $12.72psf, down 9.6% over 3Q 2008.


• Tucson: 3Q 2009 $18.24psf, down 9.5% over 3Q 2008.


• Miami-Dade: 3Q 2009 $25.83psf, down 9.3% over 3Q 2008.

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ABSORPTION

With the delivery of well-leased new retail buildings and retail leasing activity at a near standstill across the nation, absorption of the nation's retail space was nearly nil (on a year-to-date net basis) at the close of third-quarter 2009. Surprisingly, more than half of the retail markets CoStar tracks have come through with positive net absorption so far this year, bringing the nation's total net absorption of retail space to a meager 3.66 million square feet, which represents only 0.04% of total retail inventory.

Ten markets showed positive net absorption in excess of 500,000 square feet at the close of third quarter. Compare this to third quarter 2007, when 31 markets recorded net absorption at this level or higher. Perhaps a more relevant figure to look at, however, is how much net retail space markets have absorbed as a percentage of their total rental retail square footage in the market. Specifically, 11 U.S. markets have absorbed at least 0.4% of their total retail space so far this year, while six markets have exuded 0.4% of their total retail space.

MARKETS SHOWING SIGNIFICANT POSITIVE NET ABSORPTION OF RETAIL SPACE
Note that seven of the following 11 markets maintain retail vacancy rates below the national average and most are among those that have either shown an improvement or very small increase in the retail vacancy rate over the course of the last year.

• Westchester / So CT: 3Q09 Net Absorption of 1.92M sq. ft. = 1.08% of total retail inventory


• Memphis: 3Q09 Net Absorption of 731,215 sq. ft. = 0.96% of total retail inventory


• Raleigh/Durham: 3Q09 Net Absorption of 714,234 sq. ft. = 0.88% of total retail inventory


• Oklahoma City: 3Q09 Net Absorption of 680,178 sq. ft. = 0.83% of total retail inventory


• Nashville: 3Q09 Net Absorption of 760,506 sq. ft. = 0.78% of total retail inventory


• Providence: 3Q09 Net Absorption of 407,639 sq. ft. = 0.77% of total retail inventory


• Long Island: 3Q09 Net Absorption of 1.7M sq. ft. = 0.76% of total retail inventory


• Kansas City: 3Q09 Net Absorption of 606,487 sq. ft. = 0.63% of total retail inventory


• Hartford: 3Q09 Net Absorption of 825,274 sq. ft. = 0.60% of total retail inventory


• Indianapolis: 3Q09 Net Absorption of 575,808 sq. ft. = 0.56% of total retail inventory


• Austin: 3Q09 Net Absorption of 392,182 sq. ft. = 0.54% of total retail inventory

MARKETS SHOWING SIGNIFICANT NEGATIVE NET ABSORPTION OF RETAIL SPACE
Note that while half of the following six markets have average retail vacancy rates below the national average, all have suffered a marked increase in the average retail vacancy rate over the course of the last year, ranging from a 165bps to 284bps increase.

• Southwest Florida: 3Q09 Net Absorption of -873,366 sq. ft. = -1.12% of total retail inventory


• Orlando: 3Q09 Net Absorption of -984,246 sq. ft. = -0.67% of total retail inventory


• Greensboro/Winston-Salem: 3Q09 Net Absorption of -621,278 sq. ft. = -0.65% of total retail inventory


• East Bay/Oakland: 3Q09 Net Absorption of -676,595 sq. ft. =-0.52% of total retail inventory


• Sacramento: 3Q09 Net Absorption of -543,118 sq. ft. = -0.48% of total retail inventory


• Tampa/St. Petersburg: 3Q09 Net Absorption of -896,125 sq. ft. = -0.43% of total retail inventory

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RETAIL PROJECTS UNDER CONSTRUCTION

At the close of third quarter, CoStar tallied 1,166 retail projects totaling 49.87 million square feet of retail space under construction, which, if completed would add only 0.55% more retail inventory to the retail landscape nationally. Whether due to a lack of retail leasing activity, retailers pulling out of commitments, or financing falling through, developers have cut their construction plans by more than 60% compared to this time last year, when there were 3,051 retail projects totaling 104.26 million square feet under construction.

According to CoStar data, 14 markets had 1 million square feet or more of retail space under construction at the close of third-quarter 2009, while 16 markets had less than 300,000 square feet under construction. Perhaps a more relevant figure to consider, however, is the amount of retail space under construction as a percentage of total retail inventory. Ten markets have retail space currently under construction that if delivered, have the potential to add at least 1% more inventory to their total retail landscape, while 11 markets have very little retail space under construction, amounting to under .2% of current retail inventory.

MARKETS WITH SIGNIFICANT RETAIL SPACE UNDER CONSTRUCTION
Note that only four of the following 10 markets have retail vacancy rates higher than the national average; however, only two of them have seen an improvement in vacancy over the course of the last year, suggesting that this level of retail space under construction could keep those vacancy rates rising as these buildings deliver.

• Las Vegas: 2.34M sq. ft. under construction = 2.05% of total existing retail space.


• Washington: 3.37M sq. ft. under construction = 1.67% of total existing retail space.


• New York City: 1.03M sq. ft. under construction = 1.41% of total existing retail space.


• Westchester/So CT: 2.29M sq. ft. under construction = 1.29% of total existing retail space.


• Dallas/Ft. Worth: 4.32M sq. ft. under construction = 1.26% of total existing retail space.


• Austin: 813,540 sq. ft. under construction = 1.11% of total existing retail space.


• Birmingham: 913,661 sq. ft. under construction = 1.07% of total existing retail space.


• Raleigh/Durham: 857,542 sq. ft. under construction = 1.06% of total existing retail space.


• Northern NJ: 3.09M sq. ft. under construction = 1.04% of total existing retail space.


• Charlotte: 657,910 sq. ft. under construction = 1.01% of total existing retail space.

MARKETS WITH VERY LITTLE RETAIL SPACE UNDER CONSTRUCTION
Note that only four of the following 11 markets have retail vacancy rates higher than the national average, but all have experienced an increase in vacancy over the course of the last year. Developers' prudent decisions to hold back on the construction of new retail space will hopefully contribute to the prevention of further erosion in vacancy in these markets.

• Dayton: 0 sq. ft. under construction


• Greensboro/Winston-Salem: 52,605 sq. ft. under construction = 0.06% of total existing retail space.


• Milwaukee: 99,200 sq. ft. under construction = 0.07% of total existing retail space.


• Baltimore: 101,585 sq. ft. under construction = 0.08% of total existing retail space.


• Madison: 41,072 sq. ft. under construction = 0.11% of total existing retail space.


• Toledo: 102,279 sq. ft. under construction = 0.15% of total existing retail space.


• Hartford: 211,600 sq. ft. under construction = 0.15% of total existing retail space.


• Tampa/St. Pete: 347,660 sq. ft. under construction = 0.17% of total existing retail space.


• St. Louis: 218,697 sq. ft. under construction = 0.17% of total existing retail space.


• Minneapolis: 341,665 sq. ft. under construction = 0.18% of total existing retail space.


• Orlando: 281,808 sq. ft. under construction = 0.19% of total existing retail space.

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RETAIL MARKET SPOTLIGHTS

SOUTHWEST FLORIDA
The Southwest Florida retail market has suffered the largest level of negative net retail absorption so far this year compared to any other retail market nationwide. Additionally, Southwest Florida has experienced the second-largest increase in the retail vacancy rate over the last 12 months (+284bps to 8.5%) and the fifth-biggest drop (-10.2%) in the average asking retail rental rate during that period.

Karen Johnson-Crowther, Principal and Director of Retail Services at Colliers Arnold in Fort Myers, ranked as a CoStar Retail Leasing Power Broker for Southwest Florida in 2008.

As Southwest Florida thrived on construction and tourism prior to this recession, the market has been plagued by unemployment (Crowther estimates unemployment of 15% to 20%). "That leaves us with a large number of residents who have little to no disposable income. So who is shopping? Nobody right now. That trickles down to retailers having a difficult time keeping their doors open. Therefore, I am not surprised at the increased vacancy rates CoStar is reporting," said Crowther.

Crowther commented on a unique factor that has contributed to Southwest Florida's negative absorption, "Just as the economy was starting to weaken, our Board of County Commissioners tripled impact fees. However, if a developer submitted his permit by January and picked it up before June, then he was grandfathered in at the lower impact fee rate. As a result, there were a number of developers who pulled the trigger on retail space and now it’s sitting empty. That, plus closing stores due to the economy is making the situation worse instead of better. We have a number of years of inventory to absorb."

As the country climbs out of recession, Crowther said Southwest Florida's positive attributes will contribute to a recovery, "We have sunshine all year, golf courses, beaches and many tourist attractions within a few minutes drive. Thankfully, our northern visitors recognize that and continue to come," she said. Despite this, Crowther expects Southwest Florida's recovery to be a "long and slow process" because its economy is so heavily dependent on construction and tourism.

LAS VEGAS
According to CoStar data from the Third Quarter 2009 National Retail Report, the Las Vegas retail market has the most retail space currently under construction as a percentage of its current total retail inventory. This figure is despite several major projects being delayed or canceled. Additionally, Las Vegas' average retail vacancy rate has increased 237bps over the last year to the current rate of 9.6% and the market has experienced the sixth-biggest decline (-9.9%) in the average asking retail rental rate over the last 12 months.

Michael Kammerling, a Senior Vice President of Retail at Grubb & Ellis in Las Vegas, was a CoStar Retail Leasing Power Broker in 2008. Kammerling described leasing retail space, particularly attempting to pre-lease retail space as "very scary at this time." He doesn't expect this issue to go away any time soon, either. "I do not think Las Vegas will recover quickly due to lack of job creation. Residential will climb out slowly and I do not see any construction jobs being created here. Also, until tourism picks up, we are pretty much sitting dead in the water," said Kammerling. Specifically, Kammerling expects Las Vegas' retail vacancy to increase over the next 12 months, with improvement thereafter.

PHOENIX
Over the course of the last year, the Phoenix retail market has suffered a larger increase in the average vacancy rate than any other market in the nation; specifically from 8.4% in third quarter 2008 to 11.4% currently. This retail vacancy rate is also the highest in the nation. On top of this, Phoenix's average asking retail rental has declined 8.5% over the course of the last year and the market has more than 1 million square feet of retail space currently under construction.

Jason Fessinger, a Partner at Strategic Retail Group in Phoenix, was a Phoenix Retail Leasing Power Broker in 2008.

"Phoenix has seen such a dramatic increase in retail vacancy due to the closing of large anchor tenants in rapid succession. There are over 272 boxes, 10,000 square feet or larger, that sit vacant on the market today. Tenants such as Linens 'N Things, Circuit City, Basha's and their concepts, Food City and AJ's, have contributed to the increase in vacancy rates," said Fessinger.

Looking forward, however, Fessinger said, "Phoenix has always been a popular growth city for tenants in other markets wanting to bring their business and concepts. This is a great city to live in and thrive in. Phoenix was hit almost all at once, detailing the sharp increase in vacancy, but we can, and will, recover quickly as newcomers to the market will be anxious to absorb the opportunities created by their predecessors. Furthermore, as our housing market recovers, I expect retail to follow suit."

HOUSTON
According to CoStar data, the Houston market has the most retail square footage currently under construction in the country (70 buildings totaling 4.32 million square feet). However, of these markets, it has one of the lowest pre-leased rates -- about 55%. Consider this in combination with Houston's current retail vacancy rate of 9.2% (which is the 13th-highest in the country and has increased 50bps over the last year) and this market could face continued challenges.

Matthew Keener is a Senior Vice President of Retail Brokerage at CB Richard Ellis in Houston and was a CoStar Retail Leasing Power Broker in 2008.

"Houston has been, and still is, a very desirable market to build in due to positive growth factors both demographically and economically - especially relative to the national market. There are very low barriers to development, due to the lack of zoning in the City of Houston, as well as many of the peripheral trade areas. Having said this, many retail projects were initiated that should not have been built and the recession stopped the majority of retailers' expansion plans ," said Keener, explaining the low pre-leased rate.

Keener expects that many Houston retail projects "will go back to the lenders who will then sell at a severe discount. Bargain buyers will be able to adjust required rents to market and slowly absorb space over the next five years or so with both traditional and non-traditional shopping center tenants. Many will be re-positioned for non-traditional uses."

As the country recovers from recession, Keener expects that "the better located and anchored centers will maintain or re-establish higher occupancies by dropping rents as needed, while inferior projects will suffer through a prolonged period of lower occupancy and reduced rents."

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