Although its recent performance has generally been regarded as trailing the other U.S. commercial real estate sectors, the retail real estate market continues to show unmistakable signs of improvement, particularly in urban infill areas.
On a recent episode of my “Commercial Real Estate Show,” my guests provided an enlightening update on the sector. Our conversation covered everything from transaction volume and consumer spending to active tenants and the types of properties sought by investors. Overall, the retail sector may not have the commercial real estate industry hoisting glasses of champagne yet, but we’re no longer crying in our beer either.
Investments sales of U.S. retail properties totaled $9 billion in third quarter 2012, up slightly from the same period last year, said Dan Fasulo, managing director of Real Capital Analytics. Through the first nine months of 2012, retail investment sales totaled $35 billion, an increase of about 5 percent from the first three quarters of 2011, Fasulo added.
Fasulo also predicted the fourth quarter to be a busy one in terms of investment sales, in part because continuing concerns about potential future tax increases will motivate owners to sell before higher rates might kick in. “I think there’s going to be a flurry of closings by year’s end,” he said.
On another good note, the retail sector is working through its inventory of distressed properties, Fasulo added. “I think we’re moving into the later innings of the distressed cycle,” he said. “We’re definitely seeing more retail properties leaving distressed [status] than are being added to distressed.”
Retail Sales Rising
Meanwhile, holiday retail sales should increase this year by about 3 percent when compared with last year, said Michael Niemira, chief economist for the International Council of Shopping Centers. “That’s a little bit slower [growth] than the year before, but still not a bad performance historically,” he said.
Looking ahead to 2013, Niemira sounded a note of caution, noting that ongoing concerns about the White House and Congress’ ability to deal with the myriad fiscal issues confronting the federal government could in turn decrease consumer confidence and stifle retail sales. “That’s not the conventional view, which is much more upbeat on 2013,” he said.
Infill In Demand
Mixed-use properties in centrally located urban areas are prospering, while their suburban counterparts continue to struggle somewhat, noted Michael Cohn, executive vice president for Cousins Properties. “Urban markets are seeing rent escalation, healthy absorption, a tremendous inflow of new retailers and expansion,” he said. “If you’re still in it with a mostly suburban portfolio, your portfolio is probably lagging somewhat and still a bit of a victim of the last cycle.
Landlords typically don’t have to grant tenant concessions to lease urban properties surrounded by sufficient daytime populations, but concessions are often still required to fill suburban sites, according to Cohn.
Quick-serve restaurants and healthcare firms are two of the more active tenants in today’s marketplace, Cohn added.
What Do Buyers Want?
REITs and institutional buyers are exhibiting a healthy appetite for core properties in gateway markets, said John Harrison, a broker in Bull Realty’s National Retail Group.
"If you own property in any of the gateway cities in the United States – say, Raleigh, Charlotte, Orlando or Atlanta in the Southeast – then this would be a great time to position your property for sale,” Harrison said. “If you were to go to market, you would see multiple offers and competing bids from REITs and institutional buyers.”
Private equity firms also have significant interest in value-add and Class-B properties.
“There is money to invest in the distressed retail segment, and buyers are courageous and tackling opportunities that require a lot of imagination,” Harrison said.
Michael Bull, CCIM, is the president and founder of Bull Realty, a regional commercial real estate brokerage firm based in Atlanta, and the host of the weekly “Commercial Real Estate Show” radio show.