Retail Forecasters See Rockier-than-Expected Recovery Over Next 12 Months

The outlook has become more bearish for retail as the summer swoon in the economy gives way to an uncertain fall. Although statistics point to a gradual recovery, weak hiring, a flat housing market and sagging consumer and investor confidence are behind revised economic outlooks for retail demand over the next 12 months.

Forecasters expect shoppers will continue to hold back on spending until economic indicators improve, and businesses are still playing the waiting game on hiring despite record corporate profits, according to Jones Lang LaSalle’s Late Summer North America Retail Outlook.

Conditions are favorable for the few retailers that are in expansion mode, affording an opportunity to take advantage of lease rates that have not quite reached bottom in many markets.

All of the 18 regional retail markets Jones Lang LaSalle tracks in its report are currently "tenant favorable" and expected to remain so for at least the next quarter or two.

With even weaker-than-expected growth in supply and demand, the outlook for rents and investment performance is notably weaker, with rent growth resuming in early 2012 but at a slower pace. Values will bounce along the bottom through 2012, with neither rents nor values coming close to making up for losses by 2015.

"Despite the strong showing of the first half of 2011, weakening economic fundamentals predict a slowdown in capital markets during the latter part of the year," said Greg Maloney, CEO and president of Jones Lang LaSalle Retail. "Consumer and investor confidence will remain low as long as uncertainty regarding global debt issues and other economic issues remain unresolved, resulting in continued sluggish retail sales that do not reach 2010 levels."

CoStar reported last month that retail investment sales bounced back in the first half of 2011.While core retail property capitalization rates have declined quickly and distressed properties have received some attention, middle-of-the-road retail locations are having valuation issues, JLL said.

Trophy malls and grocery-anchored centers continue to attract investor interest, with more strip centers trading in the second quarter than for the entire 12 months of 2010, primarily due to Blackstone’s purchase of the Centro portfolio, JLL said.

Only $1.6 billion in distressed retail properties was added in the second quarter, the lowest level since the third quarter of 2008. Most experts believe the retail sector is now halfway through its distress pool, with more than $1 billion in sales transactions executed for distressed properties over the last two quarters, according to JLL.

"Good quality real estate continues to do very well and poor quality real estate continues to do proportionally worse," said Colliers International National Director of Retail Mark Keschl.

"What’s determining some of the nature of the quality is property in the suburbs and distant suburbs, where a lot of retail got built around new subdivisions," Keschl said. "All of a sudden, housing stopped, and now there are centers that don’t have large enough populations to support them. Those properties are going to see tough going until population starts to fill back in, which could be three to five years down the road."

One reason for optimism is that store expansion continues to gain momentum, with current growth plans up by 10.5% from the same time last year, led by growth in urban areas, according to the JLL outlook. Store closure announcements fell 36% from 2,800 a year ago to just under 1,800 in the last quarter.

Keschl said power centers are improving and most of the high-quality closed Circuit City and Linens N Things locations have been absorbed by other retailers. In many cases, non-retail, local or regional tenants will eventually take many of the lesser locations. Tenant interest in the 250 Borders stores coming onto the market, mostly high-quality big-box locations, appears fairly strong, he said.

Books-A-Million is taking 13 stores under direct assignment from Borders at fairly strong rental rates, but the majority could go to non-book retailers such as TJ Maxx, discount clothing stores and other retailers that need to boost store counts, Keschl said. Other active retailers include arts and crafts chains like Michael's and Joann's Linens and pet store chains like Petco and PetSmart.