The retail industry met with mixed performance in 1995, as certain retail types performed better than others. Power centers and factory outlets enjoyed the majority of investor activity in 1995, while regional malls struggled as competition from alternative retail formats persevered. The fierce competition between retailers and the ongoing shakeup and consolidation of big name retailers has forced some retailers into bankruptcy. In fact, there is concern that there are too many of all kinds of retail facilities, however power centers, factory outlet malls and small tenants in anchored centers, did establish themselves as dominant in the retail sector and show promise for 1996.
Regional retailers are building facilities in excess of 100,000 square feet, which is incomprehensible when compared to the 1970s and 1980s. The "superstore" concept has been embraced as the savior of the retail sector. The draw of these facilities is overpowering, as they are fierce competition to traditional formats. Bargain shopping appeals to most shoppers, enhancing the allure of the power center and continuing to erode the attraction to regional malls. Many markets are finding this allure to be significant and fear overbuilding will occur, particularly in light of the restructuring and possible bankruptcy of several big name retailers. Further uncertainty surrounds retail sale figures, which reported a 6% increase in July 1995 over July 1994. According to TeleCheck's same store index, (figures based on volume of checks written), retail sales increased only 1.5%, over the same time period. This inconsistency may be attributable to a 14% increase in consumer debt from levels one year ago, which will surpass $1.0 trillion before year-end.
While fundamental retail factors establish retail as a stabilizing asset, current turmoil and competition among retailers threatens the steadiness of this market. The shakeout of major retailers emphasizes the competitiveness within the retail environment. Never has there been a more critical time for retailers to study demographic and business cycles to successfully position themselves to weather the storm. Clearly, investors are entering this market cautiously, with primary interest in centers with sustainable "franchises", which will provide stability for the future. Repositioning of centers will be critical and niche marketing will be necessary to move with the changing demographics of an aging society. These lifestyle changes require retailers to re-merchandise to meet the makeup of local submarkets. The "baby boomer" dollars may move from upscale women's and men's apparel to household furnishings, etc.
Regional malls, which were the stars of the 1980s, have found the going tough, particularly in Class "B" and "C" products. Institutional investors do not typically acquire Class "B" or "C" properties, limiting the demand for these products. Very few Class "A" products exist, as institutional investors purchased the majority of these properties over the past few years, with a long term hold objective. Stagnant rent levels and the expiration of operating agreements, which were signed in the 1970s and early 1980s provide additional problems for malls. Coupled with the cost of retenanting, tenant bankruptcies and the fierce competition from factory outlet malls and power centers adds additional burden to this already weakened asset class.
The retail market is often gauged by average retail sales of categories sold in stores. These categories include General Merchandise, Apparel and Accessories, Furniture and Other sales. These sales are generally referred to as GAFO sales. GAFO sales per household have been identified on the retail survey. As noted, Portland, Maine has the highest GAFO sales per household at $16,292, followed by Dallas with GAFO sales per household totaling $15,361. Neither MSA made the top ten list due to other negative factors.
The cities surveyed by VIL members suggest retail has strengthened overall; however, some signs of weakness are personified by the increase in mall vacancy rates, increasing 110 basis points from last year's rate of 5.9%. All non-mall retail vacancy rates declined to 8.4%, down from 9.7% last year. The most dramatic change was identified in the total value change from 1992-1995. Last year, from 1991-1994, a total value change of 0.6% was reported, compared to 7.4% this year. This suggests that 1995 was an exceptional year for retail properties, as values were significantly enhanced. Again, the question remains whether the value increases are justified, given the fundamentals of the sector. Investors are cautioned to analyze retail investments carefully, as this sector is evolving with an abundance of casualties expected.
Top Retail Markets
After analyzing quantitative data, which includes vacancy rates, GAFO sales, years to balance and population and household growth by percentage and absolute change, we have identified the following markets as the best retail opportunities for investors:
1.Atlanta, GA 6. Portland, OR 2.Minneapolis, MN7. Columbus, OH 3.Denver, CO8. Phoenix, AZ 4.Seattle, WA 9. San Francisco, CA 5.Orlando, FL10. Washington, D.C.
Eight MSAs return to the top ten, compared with last year's publication. Newcomers, such as Phoenix and Portland, replaced Cleveland and Omaha. Cleveland reports increasing vacancy rates and both MSAs report declining GAFO sales of 6.77% and 8.22% from last year. Atlanta enjoys the top spot, fueled by the upcoming Olympic events, and moves Seattle to the number four position.
Phoenix is a newcomer to the top ten, primarily due to its solid vacancy rate of 9% and a forecasted increase in value of 20% from 1995-1997. Phoenix is also forecast to increase substantially in population and household formation. Nearly 30,540 households will be formed annually from 1996-2001. Retail starts are swelling; however, caution is advised as this market can be rapidly oversaturated. Portland, Oregon, ranked sixth this year, enjoyed an increase of 19.35% in GAFO sales per household, compared to last year.