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Retail Space Availability Reaches All-Time High

CoStar Webinar Reveals Current State and Forecast of the Retail Real Estate Market
April 22, 2009
Jay Spivey, Sr. Dir. of Research & Analytics for CoStar
Jay Spivey, Sr. Dir. of Research & Analytics for CoStar
The nation's retail market posted negative quarterly net absorption for the first time, along with the highest vacancy and availability rates, since CoStar Group began tracking retail trends in 2000, according to the Bethesda, MD-based company's first-quarter 2009 retail review and forecast.

On the heels of the release of CoStar's First Quarter 2009 National Retail Report, Senior Director of Research and Analytics Jay Spivey conducted a webinar titled "The State of the Commercial Real Estate Industry: 1st Quarter 2009 Retail Review," on April 17.
Spivey noted that quarterly retail leasing activity has dropped off about 9 million square feet over the last two quarters, leading to 24 million square feet of negative net absorption and a 7.2% total vacancy rate recorded during first quarter.

Retail space listed as "available" for lease (which could be vacant or occupied) has been rising at an increasing rate. Since the start of the recession, 697 million square feet of available retail space has been added to the market, Spivey showed. This level of availability may be a more realistic indicator of the state of the market than vacancy, said Spivey. Specifically, retail space availability has increased a staggering 1,280 basis points to 19.4% since second-quarter 2006, while the vacancy rate has increased only 120 basis points over the same period.

Supporting the build-up of available retail space, CoStar's research shows that the average days a retail space is listed on the market as "available for lease" has continued to rise -- from 174 days in first-quarter 2006 to 370 days in first-quarter 2009.

Landlords have only recently showed a definitive response to the down market by lowering asking rental rates. The average rental rate has declined from $17.64 per square foot in second-quarter 2008 to $17.51 per square foot at the close of first quarter.

To demonstrate the impact retailers closing large amounts of stores can have on retail real estate fundamentals, Spivey used Circuit City's closure of 567 stores as an example. As Circuit City was typically an anchor tenant at community or power shopping centers, CoStar found that the average vacancy rate at shopping centers where Circuit City occupied space has shot up to 22.2%, while average asking rental rates have lowered from a high of nearly $25 to a low of about $21 per square foot. If that's not enough pressure on those landlords, Spivey pointed out co-tenancy issues may arise, causing additional vacancy at these centers. For example, CoStar found that Verizon Wireless is a co-tenant in 192 of 388 Circuit City shopping centers.

Aside from retailers closing stores and a lack of retailers opening new stores, Spivey showed that retail real estate is feeling more pain during this recession due to excess inventory. In the past 15 years, 510 million square feet of retail space has delivered, accounting for 7% of total retail square footage. The good news is that developers have backed off, showing a downward trend in deliveries since 2006, said Spivey.

So far in 2009, Spivey said 895 retail buildings totaling 23.5 million square feet have delivered and this new space is about 67% leased. Developers have lowered the average asking lease rate on these new buildings from their peak by about 7% to try to keep leasing momentum going.

Currently, there is about 82 million square feet of retail space under construction, but square footage scheduled to deliver this year will cause only about a 0.6% addition to the total retail market, Spivey said. These under-construction properties are currently 57% leased and to attract new tenants, developers have responded by lowering the average asking lease rate a hefty 29% from a peak of $37.74 per square foot, he added.

The Westchester, Northern New Jersey, and Dallas markets were identified as having the most retail square footage under construction as a percentage of total inventory. Benchmarking new retail space deliveries against absorption levels, Spivey identified Los Angeles and Atlanta as having more excess retail inventory than any other markets. For more regional leasing trends, follow this link.

To put the U.S. retail real estate market in perspective, Spivey said that average retail building was built in 1968 and is 15,568 square feet. Further supporting the role small retail centers play, Spivey said that only 3% of retail buildings in the U.S. are 100,000 square feet or larger, but these buildings account for 39% of total retail space. Spivey then broke down retail leasing trends by property type. For more on that, follow this link.

Unfortunately, CoStar is forecasting that the retail vacancy rate will continue to climb, surpassing 9% sometime in the next year, said Spivey. Additionally, negative absorption nearing 100 million square feet is expected against a backdrop of about 125 million square feet of new retail space and continually declining rents.


Since the start of the recession, total U.S. quarterly retail sales volume has plummeted from about $4.5 billion to $1.25 billion, said Spivey. The drop-off in transaction volume is largely due to a disconnect that continues between sellers' and buyers' expectations in pricing, he added.

Currently, "we've got buyers that are not willing to budge from what they're looking for [between $60 and $170 per square foot] and sellers obviously not willing to come down to those prices [asking prices range between $130 and $400 per square foot]," said Spivey, showing a slide indicating that the overlap, or 'meeting of the minds' on price where deals get done is very small. (When transaction volume was at its peak, buyers and sellers had a very large overlap in pricing expectations)

Although it has taken quite a while, sellers are coming down on price. Spivey showed that the average sale price per square foot has dropped from $235 to $125 since the recession started, while the average time a property spends on the market has increased from about 255 to 334 days. While the average cap rate fluctuated between a tight 6% and 6.25% from 2006 to third-quarter 2008, buyers are starting to see some relief in the form of higher margins, as the average cap rate has crept up to just under 7%, according to Spivey. For more current retail sales statistics, click here to read a recent CoStar article.

CoStar forecasts that sometime in the next two to three years, the average retail cap rate could hit a level that is 400 basis points higher than where it was at the start of the recession. If that happens, the average cap rate would be around 11% (a high not seen since 1994), which would create better margins for buyers and should fuel transaction activity. Additionally, CoStar forecasts that the average sale price per square foot could go as low as 70% off pre-recession pricing and sales volume could end up as much as 90% off pre-recession activity, sometime in the next two to three years.


Spivey discussed the economic trends driving CoStar’s retail real estate market forecasts. First, he showed that declining absorption of retail space follows along fairly closely with declining change in the gross domestic product, which has yet to improve, based on March data.

Much of the reason retailers have halted expansion and closed stores is due to poor retail sales stemming from consumers tightening their pockets. Spivey showed that the decline in retail sales has correlated closely with the drop in residential demand and home sales; which makes sense as consumers are saving more money in this recession due to their depleted confidence related to rising unemployment, tight credit markets, and a depletion in their home values.

With the current unemployment rate at 8.5%, the highest level since 1984, Spivey showed that 16 months into this recession, the economy has lost about 4% of its jobs, making it the fourth-worst recessionary percentage job loss in history so far. Unfortunately, Spivey said, employment growth isn't forecasted until 2011.

The National Association of Realtors reported that existing home sales in February, although soft, were up 5.1% over the previous month. This transaction activity continues to be fueled by first time homebuyers taking advantage of low prices -- February's national median existing home price was down 15.5% year-over-year. Additionally, the number of buyers looking for homes continues to rise and mortgage applications have risen, said the NAR, predicting that home sales will really pick up in late spring.

For the week ending April 11, the International Council of Shopping Centers said in its weekly report that its chain store sales index "rose by 0.8% over the prior week--which extended the up-tick for three weeks...the longest string of positive readings since February." For April, ICSC is predicting a 1.0% rise in sales "with the potential of a considerably stronger showing."

Additionally, ICSC referenced the Gallup Poll as a positive sign, "Americans’ reported satisfaction with the way things are going in the country remains decidedly negative, but has slowly and steadily improved in recent weeks. In March 30-April 5 Gallup Daily polling, 26% of Americans were satisfied, up from 15% in mid-February.

Spivey showed a historical trend revealing that the last few months of each recession have been marked by a sharp, consistent rise in consumer confidence. Latest results show we could be seeing the start of such a rise. The Conference Board's Consumer Confidence Index improved slightly from 25.3 in February to 26.0 in March. Additionally, consumers’ expectations for business conditions in the next six months improved -- from an index of 27.3 in February to 28.9 in March. Also improving was consumers' employment outlook -- consumers expecting fewer jobs in the months ahead decreased to 42.6%from 47.0%, while those expecting more jobs edged up to 7.1% from 6.8%.


In this webinar, Spivey also shared details on the firms listing the most retail space with CoStar, which we thought readers would find interesting.

Spivey said there is currently 2.3 billion square feet of retail space listed on CoStar. The top 10 owners account for 19% of total retail listing square footage, followed by the top 10 brokerage firms accounting for 16% and the top 10 brokers accounting for 15%.

Retail owners listing the most available retail space include Developers Diversified (20.47M), Kimco (15.54M), Centro (14.56M), General Growth (8.55M), Simon (7.6M), Inland (6.45M), Phillips Edison (5.36M), Weingarten (4.27M), Regency Centers (4.18M), and Macerich (3.97M).

The brokerage firms listing the most available retail space include CB Richard Ellis (48.17M), NAI Global (29.13M), Grubb & Ellis (21.43M), Colliers (21.02M), Corporate Offices (13.24M), Cushman & Wakefield (11.89M), Centro (11.79M), Gordon Brothers (8.68M), Excess Space Retail Services (7.98M), and SRS Real Estate Partners (formerly Staubach Retail, listing 7.01M).

(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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