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NOT A GOOD START: First Quarter Retail Real Estate Trends Reflect Market Realities

CoStar's Retail Real Estate Stats Reflect Recessionary Market Realities
April 8, 2009
In this preview of CoStar Group's First Quarter 2009 National Retail Market Report, which provides comprehensive statistics for national and local retail real estate trends and will be available to CoStar subscribers soon under the Analytics / Market Reports headline on the CoStar Control Panel, CoStar Advisor looks at the highlights -- and lowlights, from the past quarter.

Given the drumbeat of retailer bankruptcies, conditions across the retail property sector were expected to reflect the market realities, and that certainly proved to be the case. For the first time since 2000, the national retail market recorded negative net absorption. A total -23.77 million square feet of negative net absorption occurred in the first quarter. That change represents an enormous swing from the 22.91 million square feet of positive net absorption recorded during the same quarter in 2008.

In addition to highlighting the national vacancy, rent, construction and leasing trends for the total retail market that are covered in the report, this article covers the best and worst-performing retail markets and breaks down trends by retail property type.


  • Average Total Vacancy Rate: 7.2%

  • Average Asking Rental Rate: $17.51 per sq. ft., triple-net

  • 1Q09 Deliveries: 667 buildings, totaling 18.25 mill. sq. ft.

  • Under Construction at YE '08: 1,357 buildings totaling 60.25 mill. sq. ft.

  • 1Q09 Net Absorption: -23.77 mill. sq. ft.

The above statistics are a snapshot of the national retail real estate market at the close of first quarter 2009 as according to CoStar's First Quarter 2009 National Retail Market Report. Please note that CoStar's total retail market statistics encompass all retail buildings (shopping centers, as well as freestanding retail buildings, urban street retail, etc.) across the 63 major markets that CoStar tracks.


The average total retail vacancy rate hit 7.2% at the close of first quarter, which is the highest level of vacancy CoStar has recorded since it started tracking the data in 2000. The vacancy rate has increased 50 basis points over the last quarter and 100 basis points over the last year.

Of the 63 major retail markets CoStar tracks, 60% have current vacancy rates that are the same or better than the national average; however, nearly all (56 of 63) recorded an increase in vacancy during the quarter -- only five markets showed a slight improvement during the quarter.

The markets with the highest total vacancy rates at the close of first quarter were: Detroit (10.7%), Phoenix (10.3%), Columbus (10.3%), Kansas City (10.1%), Indianapolis (10.1%), Atlanta (9.9%), Dayton (9.7%), Memphis (9.5%), Birmingham (9.3%), and Las Vegas (9.3%).

  • New additions to the list this quarter are Columbus and Las Vegas, while the Texas markets of Dallas / Fort Worth and Houston fell off the list.

  • Six of these 10 high-vacancy markets recorded a marked rise in vacancy over the last quarter.

  • The markets with the largest first quarter increase in the average retail vacancy rate: Las Vegas (+154bps), South Bay / San Jose (+113bps), Baltimore (112bps), Inland Empire CA (+111bps), Southwest FL (+98bps), Phoenix (+94bps), Atlanta (+94bps), Sacramento (+89bps), Oklahoma City (+82bps), and Orange County CA (+82bps).

The markets with the lowest total vacancy rates at the close of first quarter were: New York City (2.4%), San Francisco (2.7%), San Diego (4.4%), Los Angeles (4.5%), Long Island (4.6%), Miami-Dade (4.6%), Orange County CA (4.7%), South Bay / San Jose (4.7%), East Bay / Oakland (4.8%), and Washington D.C. (5.0%).

  • These are the same markets that were in the top 10 last quarter.

  • Six of these 10 low-vacancy markets showed a marked increase in vacancy over last quarter.

  • The only markets recording a decrease in the average retail vacancy rate during first quarter were: Memphis (-29bps), New York City (-22bps), Columbus (-15bps), Toledo (-6bps), and West Michigan (-2bps).

Market Vacancy Forecasts
In its 2009 National Retail Report, Marcus & Millichap ranked 43 major U.S. retail markets based on a number of forward-looking indicators, including forecasted employment growth, vacancy, construction, household formation, retail sales, rent growth and an additional analysis of local housing market conditions.

Bernie Haddigan, managing director of the national retail group said, "With tenant demand for space easing throughout the country, the performance of individual markets in the near term will be determined largely by recent supply trends. Traditionally supply-constrained markets such as San Diego, San Francisco and Portland will outperform this year, while markets where developers delivered space with the assumption of continued population growth, including Phoenix, Sacramento and Atlanta, will record significant vacancy increases and considerable rent declines."

  • Marcus & Millichap forecasted the markets that will maintain the lowest retail vacancy in 2009: San Diego, San Francisco, Orange County, San Jose, New York City, Los Angeles, Seattle, Washington, D.C., Portland, and Oakland.

  • The markets the firm forecasts will end up with the highest retail vacancy in 2009: Cincinnati, Houston, Cleveland, Kansas City, Dallas / Fort Worth, Columbus, Phoenix, Indianapolis, Atlanta, and Detroit.

Want to know how your market ranks? Download CoStar's first quarter 2009 National Retail Report. For CoStar subscribers it is available under the Analytics / Market Reports headline on the CoStar Control Panel. For non-subscribers, the report can be ordered via CoStar's Yahoo Store by following this link.


CoStar found that the national average retail asking rental rate has been on the decline for the last six months. The current rate of $17.51 per square foot, triple-net, represents a 0.5% decrease over year-end 2008, but a 0.5% increase over first quarter 2008.

As the markets with highest and lowest overall average retail asking rental rates remain relatively the same from quarter to quarter (high-rent markets are typical dense, urban areas and low-rent markets are typically economically-depressed areas), it is more pertinent to identify the markets showing the largest percentage improvement or decline in rental rates. Over the last quarter, 73% (46 of 63) of the markets CoStar tracks recorded a decline in the average rental rate, while 60% recorded a decline over the last year.

  • The markets showing the biggest decline in the average retail asking rental rate over the last quarter: are Tulsa (-4.5%), East Bay / Oakland (-4.3%), New York City (-4.1%), Nashville (-3.6%), Orange County CA (-3.4%), Tucson (-3.4%), Richmond (-3.3%), Baltimore (-3.2%), Greensboro / Winston-Salem (-3.1%), and San Francisco (-3.1%).

  • The markets with the biggest increase in the average retail asking rental rate over the last quarter: Broward County (+3.0%), Inland Empire CA (+2.8%), Cincinnati (+2.7%), Charlotte (+2.0%), San Antonio (+2.0%), Sacramento (+1.9%), Houston (+1.8%), Birmingham (+1.6%), West Michigan (+1.2%), and Jacksonville (+1.1%).

Marcus & Millichap predicts that average retail center asking rental rates will decline 4.5% in 2009. "Effective rents slipped 1.1% in 2008 and are projected to drop 5% this year. Many oversupplied markets will record steeper declines," said Haddigan. Effective rents, which are hard to track, have become a big issue for landlords as struggling retailers are requesting to renegotiate leases -- for more on this issue, click here to read a recent CoStar story on the subject.


CoStar's first quarter statistics show that retail developers have clearly responded to the challenging leasing market and tight credit market by delaying or cancelling retail projects. However, the 30% decrease in retail construction Marcus & Millichap forecasts will occur this year, "will not prevent vacancy from increasing substantially due to store closures and reduced retailer expansion," said Haddigan. And while an estimated two-thirds of space expected to deliver this year is pre-leased, "it is likely that more space will come to market vacant, as retailer bankruptcies are set to rise, leading to an increase in lease cancellations," he added.

During first quarter, 667 buildings, totaling 18.25 million square feet were delivered, which is the lowest amount of deliveries recorded during any quarter in the last three years, by a significant margin. Specifically, during first quarter 57% less retail space was delivered than fourth quarter 2008 and 56% less retail space was delivered than the same period a year ago.

At the close of first quarter, there were 1,357 buildings totaling 60.25 million square feet under construction, which is 13% less retail space than was under construction at year end 2008 and 51% less than square footage under construction one year ago.

Haddigan talked about the problems recently-delivered retail properties are facing, "Some of the hardest-hit properties are those recently delivered in perimeter locations that relied on thousands of new homes that were either never built or now stand vacant. These properties have become difficult to lease and sell, as land values have slipped and establishing 'market-rent' is nearly impossible."

Market Rankings

The markets with the most retail space currently under construction: Dallas / Fort Worth (5.63M SF), Northern NJ (5.4M SF), Westchester / So. CT (3.57M SF), Philadelphia (3.49M SF), Las Vegas (2.58M SF), Houston (2.22M SF), San Antonio (2.13M SF), Los Angeles (2.07M SF), Hampton Roads (1.65M SF), and New York City (1.49M SF).

  • This quarter, Hampton Roads and New York City replace Atlanta and Chicago on this list.

  • Half of these markets have more retail space under construction than they did last quarter.

  • The markets on this list with current vacancy rates higher than the national average will most likely have the biggest challenge leasing this under construction retail space; those markets are Las Vegas, Dallas/Fort Worth, Houston, San Antonio, and Philadelphia.

The markets with the least amount of retail space under construction: (under 157,000 square feet) Toledo, Madison WI, West Michigan, Dayton, Greensboro / Winston-Salem, San Francisco, Tulsa, Charlotte, Indianapolis, and Oklahoma City.

  • This quarter, West Michigan, Madison, Oklahoma City, and Charlotte are the newcomers on the list, replacing Columbus, Milwaukee, Minneapolis, and South Bay.

  • While some of these markets have a low amount of space under construction simply due to high barriers to entry, developers in these markets have obviously made a strategic decision to halt the addition of new retail space, as five of the 10 markets have vacancy rates above the national average.

The markets with the most retail space delivered during first quarter: Atlanta (1.7M SF), Dallas / Fort Worth (786K SF), Chicago (759K SF), Tampa (757K SF), Houston (743K SF), Los Angeles (728K SF), Las Vegas (703K SF), Denver (658K SF), Washington D.C. (636K SF), and Philadelphia (616K SF).

  • Unfortunately, only three of these markets have a good likelihood of leasing this space -- Los Angeles, Washington D.C., and Tampa are the only markets with current vacancy rates below the national average.

  • Add to this the fact that the high vacancy markets of Dallas, Chicago, Houston, Atlanta, and Las Vegas already have a flood of new retail space on the market -- the five ranked among the 10 markets adding the most new retail space to their landscapes during 2008.

The markets expected to see the most retail space delivered during 2009: (According to Marcus & Millichap, in order) New Jersey, Dallas/Fort Worth, Houston, Phoenix, Chicago, Atlanta, Washington D.C., Philadelphia, Los Angeles, and San Antonio.

Want to know how your market ranks? Download CoStar's first quarter 2009 National Retail Report. For CoStar subscribers it is available under the Analytics / Market Reports headline on the CoStar Control Panel. For non-subscribers, the report can be ordered via CoStar's Yahoo Store by following this link.


For the first time since CoStar started recording the data in 2000, the national retail market recorded negative net absorption. During first quarter, net absorption totaled -23.77 million square feet, which compares to positive net absorption of 22.91 million square feet recorded during the same quarter in 2008.

This high level of negative net absorption is substantially the result of so many retail stores closing their doors after a failed holiday season, combined with un-leased retail space coming on the market as new building delivered during the quarter.

  • During first quarter, the markets that saw the largest net amount of retail space become vacant, as a percentage of total retail rentable building area (RBA), in order, were: South Bay / San Jose, Las Vegas, Inland Empire CA, Sacramento, Pittsburgh, Baltimore, San Diego, Phoenix, Oklahoma City, and Nashville.

  • During first quarter, the markets that saw the largest net amount of retail space leased-up, as a percentage of total RBA, in order, were: Madison WI, Memphis, Richmond, Columbus, New York City, West Michigan, Austin, Toledo, Cincinnati, and Salt Lake City.

KEY STATS by Shopping Center Type

In the aftermath of a record number of store closings and retailer bankruptcies, combined with overbuilding in some markets, the national retail vacancy rate of 7.2% seems better than expected; particularly when a number of media reports have referred to retail vacancy in the range of 10%. This is easily explained, however. The following breakdown of shopping center type statistics shows that freestanding retail buildings and urban street retail buoy the market (vacancy for these buildings is currently only 5.2%, up just 26bps over the last 12 months) -- high vacancy is much more pronounced amongst the nation's multi-tenant shopping centers.

Average Total Vacancy Rates

  • Strip Centers: 11.0% (up 40bps over 4Q09, up 130bps over 1Q09)

  • Neighborhood Centers: 10.1% (up 50bps over 4Q09, up 120bps over 1Q09)

  • Community Centers: 9.7% (up 60bps over 4Q09, up 140bps over 1Q09)

  • Power Centers: 7.9% (up 130bps over 4Q09, up 270bps over 1Q09)

  • Lifestyle Centers: 7.6% (up 50bps over 4Q09, up 170bps over 1Q09)

  • Regional Malls: 7.1% (up 81bps over 4Q09, up 148bps over 1Q09)

  • Outlet Centers: 7.0% (up 60bps over 4Q09, up 135bps over 1Q09)

  • Super Regional Malls: 3.3% (up 60bps over 4Q09, up 111bps over 1Q09)

Note: For definitions of these shopping center types, please refer to the "Terms & Definitions" section of the National Retail Market Report.

Strip, Neighborhood, and Community Centers

The biggest culprits of high vacancy are strip, neighborhood and community centers -- combined, their average vacancy rate has increased 131 basis points over the last year to 10.2%. Additionally, these centers are primarily to blame for the high level of negative retail absorption. During first quarter, this category racked up -10.24 million square feet in net absorption, accounting for 43% of the total national retail market's negative net absorption.

Strip centers, which are typically unanchored, have become plagued by the loss of their few "mom & pop" tenants, causing their vacancy to rise to 11% -- the highest for all retail property types. Community and neighborhood centers, also greatly affected by the loss of local tenants, have proven to be slightly more resistant due to their balance of grocery and other necessity-based tenants.


Malls have been the subject of much speculation surrounding their ability to survive this recession, particularly enclosed malls. Several mall landlords have seen their properties go into receivership, while others suffer from high vacancy resulting from department stores and key junior anchor stores going dark, starting a "domino effect". Additionally, several national retailers have chosen to discontinue specialty retail concepts, as well as downsize stores in an effort to cut operating expenses.

Considering these factors, the national mall vacancy rate of 4.7% seems low (includes malls and lifestyle centers) -- the issue only surfaces when vacancy is broken down to mall type. Super-Regional malls, which are typically 750,000 square feet or larger and have three or more department store anchors, are proving to be much more "recession-resistant" than their smaller counterparts. Regional malls, which typically have two or more department store anchors and are 400,000 square feet or larger, have experienced a 148 basis point increase in vacancy over the last 12 months, to land at 7.1% at the close of first quarter.

Lifestyle centers, the open-air, new-age version of regional malls, have seen vacancy increase 170 basis points over the last 12 months to 7.6%. This pronounced rise is not only due to new centers being delivered with low occupancy, but also tenants falling out as customers choose to shop at discount stores, foregoing non-necessity purchases at these upscale lifestyle centers.

"Many existing malls continue to struggle, but some are finding success re-tenanting vacant anchor space with non-traditional tenants, such as grocery chains or warehouse clubs," said Haddigan. For a recent CoStar story on non-traditional shopping center tenants, click here.

Power Centers

Power centers have experienced a substantially faster-paced rise in vacancy as compared to all other retail property types (+270 basis points over the last 12 months to 7.9%). This is not a surprise, as power centers, primarily comprised of "category-killing" specialty junior anchor tenants, have suffered from losing many of the second and third-tier category tenants to bankruptcy (Circuit City, Linens 'n Things, etc) or underperforming store closures, which then creates co-tenancy issues and a resulting vacancy domino effect.

Outlet Centers

Outlet centers, thanks to their off-price tenant composition attracting "deal-seeking" shoppers, currently have the second-lowest vacancy rate of all shopping center types. Additionally, outlet center landlords have benefited from some national retailers choosing to open outlet stores instead of full-price stores -- many are newly-entering the outlet space in this recession.

For more forecasts on what's to come in retail real estate, follow this link to read CoStar's recent article, "DON'T SHOOT THE MESSENGER: Full Recovery for Retail Real Estate Could be as Far off as 2012."

Want to know how your market ranks? Download CoStar's first quarter 2009 National Retail Report. For CoStar subscribers it is available under the Analytics / Market Reports headline on the CoStar Control Panel. For non-subscribers, the report can be ordered via CoStar's Yahoo Store by following this link.

(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 Also, click here to subscribe to CoStar's dedicated Retail RSS Feed.

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