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Retail Market Purges Fear of Double Dip

Retail Property Expected To Bounce Back from Languid Second Half 2011 Performance
February 22, 2012
Retail properties went through a see-saw swing last year with strong leasing during the first half of the year surging upward only to deflate later in the year as several economic shocks threatened to derail the economic recovery. However, the industry is starting to regain some momentum as 2012 progresses, according to new retail outlooks from Marcus & Millichap, Savills US and Colliers International retail groups.

With retail sales now exceeding pre-recession highs following a generally positive holiday retail season, performance improvements in the retail property sector have begun to spread, according to John J. Kerin, president and CEO, and Hessam Nadji, managing director research and advisory service of Marcus & Millichap in their 2012 National Retail Report.

According to the report, low interest rates and attractive returns ahead of an eventual recovery in rents are expected to keep transaction velocity on a rising trend line in 2012. Risk aversion will be a factor for the foreseeable future with stable assets in high-density locations fetching a premium and experiencing further cap rate compression.

However, the appetite for contrarian and more value-add opportunities is also expanding given the better-than-expected economic performance, Marcus & Millichap reported. These favorable conditions will entice more owners to list assets that no longer meet their broader investment strategies while the wide gap between interest rates and cap rates will draw increased buyer activity.

Gerry Mason, head of Savills US retail group, also sees an improving market ahead. He noted that the retail property market is continuing to purge tired concepts and inefficient business models, which will ultimately lead to a recovery in the sector - albeit a slow one.

"Marginal improvements in second half of 2011 leave most cautiously optimistic about 2012," Mason said in the Savills report, adding though that "slow recovery is expected as most companies will look to improve balance sheets and strengthen core portfolios."

"Double-dip recession still lingers in the minds of some," Mason said. "Many retailers are still pulling back the reins on expansion and growth plans amidst fears that fundamentals could erode again."

Segments on the upswing include grocery-anchored and outlet center category, Mason said as he noted that retail landlords such as CBL & Associates and Tanger Outlets are among the most active developers scheduled to break ground in 2012 on new projects.

In a third newly issued report, Ann Natunewicz, national manager of U.S. retail research for Colliers International's Retail Services Group, said that 2012 is shaping up to be a pivotal year for the industry.

"2012 is a huge year for retail and for real estate in general. How landlords and retailers respond to mobile commerce, their ability to partner and innovate, will determine how well they monetize shoppers who are already in their physical space-a huge advantage over earlier e-commerce, which was all transacted somewhere else."

Colliers said investors can expect "a wild ride for equities" in retail real estate investments: U.S. equities markets will continue to react to news on any and all economic indicators, including ongoing news of store closings. The angle of these reports will vacillate between opinions of "smart consolidation of poor-performing assets" to a possible harbinger of corporate economic trouble.

Colliers also said it expects that the distressed retail property asset pipeline will begin to move in 2012: Data shows that more than $350 billion in commercial real estate loans will mature both this year and in 2013. The opportunity for retail investment lies between the trophy assets still trading at low cap rates, and the large pool of marginal, low- or no-cash flow assets that can't be refinanced, which will either default on maturing debt or be transacted in a "fire sale." Also, more institutional players will be scouting around for retail portfolios (public REITs are sitting on huge capital reserves).

Foreign investors will also turn to retail property in U.S, Colliers reported.

"Yield-seeking investors need places to park their money, and the stability of U.S. property markets still make them attractive destinations for 'flight capital,'" the company reported.

Retailers seeking urban sites-, including big boxes, will come back in force this year, too.

"The economic crisis hit suburban communities much harder than their urban counterparts, so as retailers seek out lower-risk growth opportunities, underserved urban areas fall firmly within the crosshairs," Colliers reported.

Blocked out of urban areas in the past because their stores were too big, big-box retailers now have two options.
  • They can go in with their large-format stores, as renewed interest in urban locations coincides with municipalities' worsening fiscal problems, or

  • Retailers can test small-format store options, take infill space, and co-opt share from smaller local operators.

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