Madison Marquette Using CoStar Data to Identify the 35 U.S. Markets with the Greatest Potential for Finding Distressed Retail Real Estate Assets
"Distressed Assets: Where to Look," is the title of a report recently released by national shopping center owner / manager, Madison Marquette, which ranks 63 major U.S. metropolitan markets based on an index measuring each market's "potential to produce distressed retail real estate assets in the coming years." In creating this index, Madison Marquette set out to identify retail real estate markets that may be more vulnerable than others, as an "early warning" tool.
To produce this ranking, Madison Marquette combined data from CoStar Group's Year-End 2008 National Retail Market Report with its own knowledge base, to create a "distress index". This index takes into account a number of key factors for each market, including:
- The total vacancy rate (direct + sublease vacant space) and the velocity at which vacancy has increased over the last year
- Total square footage absorbed during the year as a percentage of total inventory
- The amount of new retail space delivered during 2008
- The amount of retail space under construction and the amount of space left to lease at those buildings, as of the close of 2008
Based on the results of this study, which was conducted by Walter Bialis, Madison Marquette's vice president of research, the company concluded that markets with an index ranking above 95 are more likely to produce distressed retail real estate assets than other markets.
"Based on our indexing, the top 35 metropolitan markets are fertile ground for distressed assets. The remaining markets, although stressed, are less likely to break under the weight of recession," said Bialis. Those 35 markets, ranked in order, with the highest index representing the highest potential for stress, follows.
(To view or download the full ranking of markets from Madison Marquette, click here.)
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How does Madison Marquette define a distressed asset in the context of this study? "When something falls into foreclosure, everybody already knows that it's a bad property," which is too late in the game, explained Bialis.
Bialis said key factors that start to define a distressed retail asset include properties with occupancy under 80%-85% that have had space for lease that's been on the market for an excessive amount of time. Bialis said the general consensus of brokers he talked to said they "start getting worried" about how long a space has been on the market when "days on market" hits six months. "Maybe that begins the definition of distress," he said.
COMMON FACTORS LINKING MARKETS
Aside from the factors already accounted for in Madison Marquette's distress index, CoStar identified some additional links between the top 35 distressed markets, as well as some links the most stable markets share.
BARRIERS TO ENTRY, LOW VACANCY, HIGH RENTAL RATES
According to Madison Marquette's index, markets with the least likely to encounter retail real estate distress include (in order) New York City, San Francisco, Long Island, San Diego, South Bay/San Jose, Orange County, Baltimore, East Bay/Oakland, Minneapolis, Boston, Washington D.C., and Los Angeles.
The major common link most of these markets share is high barriers to entry, which translates into very little new retail space under construction in these markets -- in many case, any new space delivering is from redevelopment projects, replacing or repurposing existing space. Despite the down economy, many landlords with available retail space in these markets continue to enjoy competition for retail space on the market. Likewise, these markets consistently rank, according to CoStar's quarterly statistics, among the highest retail rental rate and lowest vacancy rate markets in the country.
Note: CoStar's Year-End 2008 National Retail Report, which Madison Marquette used to calculate this index, is now available to CoStar subscribers by locating the "Market Reports" link on the CoStar Gateway. It is also available to non-subscribers via this link.
RETAIL SQUARE FOOTAGE PER CAPITA
Based on the Bureau of Labor Statistics' 2007 Metropolitan area population estimates against CoStar's year-end 2008 retail property statistics, the median retail square footage per capita for these 63 markets is 50.2 square feet per capita. Based on this, approximately 60% (21 of 35) of the U.S. markets Madison Marquette labels as "fertile ground" for distressed retail assets have more retail square footage per capita than the U.S. median.
With the caveat that retail square footage per capita data may be skewed for strong tourist markets and metropolitan areas with broad regional reach beyond the population measure for that market; the high per capita statistics suggests that many of these markets may be overbuilt in retail, contributing and adding to their potential for retail real estate asset distress.
Those in the top 35 with some of the highest retail square footage per capita figures in the nation include Southwest Florida (73.2), Greensboro/Winston-Salem (66.8), Broward County FL (65.3), Jacksonville (61.7), San Antonio (61.4), Las Vegas (61.1), Birmingham (60.4), and Palm Beach County FL (59.4).
To receive the current retail square footage per capita statistics for your market, email the editor, Sasha Pardy, at spardy@costar.com.
UNEMPLOYMENT RATES
As unemployment rates are so closely linked to consumer spending, and therefore linked to the sales productivity of tenants at shopping centers, a commonality expected between these "potentially distressed" retail real estate markets would be high unemployment rates.
As of December 2008, nearly 46% (16 of the 35) of the metropolitan markets Madison Marquette labels as "fertile ground" for distressed retail assets had an unemployment rate higher than the 7.2% national average. Of these, six of the 10 markets ranked highest on the distress index have unemployment rates higher than the national average, including Detroit (10.6%), Providence (9.6%), Las Vegas (9.1%), Sacramento (8.7%), Atlanta (7.6%) and Memphis (7.6%).
Perhaps more telling is the pace at which unemployment has been increasing in these markets -- 54% (19 of the 35) of the markets with the most potential for distress have experienced a significant change (220 basis points or higher) in the unemployment rate during 2008.
HOME FORECLOSURE RATES
For many U.S. markets, especially those with aggressive population growth and therefore, quick growth in residential real estate, the stability of retail real estate began to plummet as home foreclosure issues accelerated.
According to RealtyTrac's 2008 U.S. Foreclosure Market Report
(released Jan. 15, 2009), approximately 60% (21 of the 35) of the metropolitan markets with the most potential for distressed retail, have housing unit foreclosure rates above the 1.84% national average. Of these, seven of the 10 markets ranked highest on the distress index have some of the highest home foreclosure rates in the nation, including Las Vegas (8.9%), Phoenix (6.0%), Sacramento (5.2%), Detroit (4.5%), Atlanta (3.3%), Memphis (3.2%), and Indianapolis (2.8%).
UTILIZING THE "POTENTIALLY DISTRESSED" MARKET INDEX
With the exception of Philadelphia, which is ranked 28th among the 35 metropolitan markets with the most potential for retail asset distress, Madison Marquette maintains a local presence, invests and operates primarily in metropolitan markets that rank among the least likely to encounter retail real estate distress. Those "safe markets", as according to the distress index, include Washington, D.C., New York City, Fort Lauderdale, San Francisco, Los Angeles, San Diego, Charlotte and Seattle.
"If we're looking at a market that is distressed, there is definitely a different acquisition strategy or third party management strategy we would take," as compared to a market with less likelihood of distress, explained Bialis. With early warning signs, "we could identify properties that may be troubled three months to a year prior to their fall. That way, we could add value, whether it be through an acquisition or third party management, before a property fails," said Bialis.
Hopefully this index, as we look at markets that fall at the bottom of the pack, the top or the middle, serves as springboard "for a strategy as we look at those markets and potential assets in those markets, in more detail," said Bialis. "Recognizing, of course, that retail real estate is a local business. In bad markets there's great properties and in good markets there's bad properties," he added.
(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to be added to the distribution list by contacting senior editor, Sasha Pardy at spardy@CoStar.com Also, click here to subscribe to CoStar's dedicated Retail RSS Feed.