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Lackluster Retail Fundamentals No Cause for Concern, Researchers Say

Lackluster Retail Fundamentals No Cause for Concern, Researchers Say

In spite of a less than stellar performance, fundamentals in the retail real estate sector were in line with most researchers’ expectations in the third quarter of 2011. Firms including CoStar Group, Reis Inc. and CBRE Econometric Advisors reported vacancy rates that were largely flat with the previous quarter, while asking rents came in flat to slightly down.

In view of limited retail space coming online this year, the lackluster figures seemed to be due to insufficient demand for new space among retail tenants. Concerns about economic performance have led to retailers feeling less then confident about accelerating new store openings, according to Reis, a New York City-based research firm.

The CoStar Group, a Washington, D.C.-based research firm that tracks all types of retail properties encompassing 71.1 billion sq. ft. of space, reported that the overall vacancy rate at U.S. centers decreased 10 basis points quarter-over-quarter, to 7 percent, after remaining flat for three consecutive quarters.

Average quoted rents, the equivalent of asking rents, declined 0.5 percent quarter-over-quarter, to $14.65 per sq. ft. Year-over-year, the figure was down 1.64 percent.

According to Reis, in the third quarter, the national vacancy rate at neighborhood and community shopping centers remained flat with the quarter prior, at 11 percent. More specifically, the rate remained flat or increased in 53 of the 80 primary metro markets the firm tracks. On a year-over-year basis, the national vacancy rate increased 10 basis points.

The average asking rental rate at neighborhood and community shopping centers stood at $18.97 per sq. ft., flat with the second quarter of this year and down 20 basis points from the third quarter of 2010.

The vacancy rate for regional malls rose by 10 basis points during the period, to approximately 9.4 percent. Asking rents rose just 0.1 percent to $38.81 per sq. ft.

Nevertheless, the figures were within the range of what Reis researchers expected to see during the quarter, according to Ryan Severino, senior economist. He notes that in spite of persistent fears about a double dip recession, fairly stable unemployment figures and rising retail sales serve as proof that another downturn remains only a distant possibility.

“We expected to see vacancy still struggle a little bit, at least at the smaller neighborhood and community centers,” Severino says.

Retail fundamentals are not likely to improve much in the fourth quarter, but “we are close to turning the corner,” he adds. “Unless we have another recession, we should start to see some improvement in the sector” in 2012.

Abigail Rosenbaum, economist with CBRE Econometric Advisors, a Boston-based research firm, echoes Severino’s sentiment. CBRE’s preliminary data for the third quarter shows that the national vacancy rate at neighborhood and community shopping centers is currently at 13.2 percent, flat with the quarter prior.

Rents have declined 0.8 percent quarter-over-quarter and 4.0 percent year-over-year.

But the numbers are in line with what CBRE expected to see in the latter part of 2011.

“We had been seeing [vacancy] rates pick up slightly over the past couple of quarters, so to have them be flat is certainly not a bad thing,” Rosenbaum says. “The sector is going in the right direction. The recovery really [won’t] pick up pace until mid-2012, heading into 2013.”

CBRE Econometric Advisors doesn’t track vacancy and rental rates at regional malls.

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