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Part 1: Sign on the Dotted Line

Part 1: Sign on the Dotted Line

Overall, 62 percent of respondents expect national occupancy rates to increase. Some 26 percent expect no change. Only 12 percent expect a decrease.

Respondents had more muted expectations on their own regions, however. When asked about the outlook for occupancy rates within the regions where they operate, 54 percent said they expect increases, 36 percent expect no change and only 9 percent expect decreases.

Jacob Frydman, chairman and CEO of United Realty, expects occupancy rates to remain flat or grow modestly given current market conditions.

“We are in a landlord’s market due to the lack of development,” he says. “Supply constraints from tighter construction lending criteria mean corporate demand will increase with continued U.S. economic outperformance and bid up the current supply. How much more these rents can be bid up is the question? We are getting closer to the break even point in many markets where the rents justify the decision to develop new properties.”

Luke Petherbridge, CFO of retail REIT DDR Corp., thinks occupancies will rise at a robust clip.

“We expect occupancy rates to rise over the next few years by about 50 to 100 basis points, as small-shop space offers opportunity for growth and overall our portfolio is dramatically higher quality and has a higher peak occupancy rate,” he says.

About 11 percent of respondents say there is too much development occurring. An additional 57 percent say there is the right amount. Another 20 percent think there is too little development occurring and 11 percent say they are unsure.

Jack Kern, director of research and publications with Yardi Systems, echoes the results and says there is little danger of overbuilding in the sector.

“The state of development in retail development is fundamentally sound. I do not believe there is overbuilding in all but the most unique areas,” he says. “Many of the largest projects develop a huge amount of new space that will take time to be absorbed but it should proceed at a normal pace. There is a shortage of retail in many under-served communities. Additional construction is a positive trend.”

DDR’s Petherbridge agrees, “We see very little new development happening currently, and view that as an appropriate amount after excessive retail development occurred prior to the recession.”

Roughly three-quarters of respondents, 77 percent, expect rents to increase in the next 12 months in their regions. Another 21 percent expect no change. And none expect rents to decline. On average, our survey indicated respondents expect rents to rise by about 3.1 percent in the next 12 months.

 “We expect rental rates at A and A+ retail centers to increase over the next year because of the high occupancy levels and relative lack of new construction. The level of increase will depend upon the subsector,” says John Ragland, senior director and head of retail asset management with TIAA-CREF Global Real Estate. “The best quality malls in the coastal markets are likely to show the strongest rental gains.”

Yardi’s Kern expects retail rents to rise below inflation rates, with only high-fashion locations seeing significant increases.

“We expect rents to climb due to demand exceeding supply in the retail sector,” adds DDR’s Petherbridge. “In the first quarter of 2015, for example, we generated new leasing spreads of 26.9 percent on a pro rata basis.”

Next Part 2 of 3: Breaking the Bank

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