Good News in Store for Retail Category

The News: RREEF Sees Good News in Store for Retail Category
March 31, 2009
By: Paul Rosta, Retail Editor, Commercial Property News

Encouraging words seem harder to find about retail than about any other property sector these days, and the analysts at RREEF Research would hardly be mistaken for Pollyannas. Nevertheless, a new forecast from the Deutsche Bank affiliate finds reasons to sound a few modestly upbeat notes.

“Good news does exist for the retail sector,” RREEF Research stated in an analysis published last week as part of a commercial real estate investment forecast, offering neighborhood and community centers as particular beneficiaries. An average of 25 million square feet of new product came on line in the category while retail was booming between 2003 and 2007. While it is substantial, that figure still represents 6.5 million square feet of space less than the neighborhood and community categories added on average each year since 1981. And it is less than half the 54 million square feet of new inventory that came on line during the retail boom years between 1985 and 1990. Vacancies for those centers will peak at 10.5 percent this year, but they will decline to 9.5 percent as the market starts recovering in 2010, RREEF Research predicted.

Leasing velocity and rental rates will take the hardest hits this year in low-barrier-to-entry locations with low land costs—in particular, locations in the Southwest and the Southeast, with the exception of South Florida. Though no markets will escape the downward trend, a few will turn in better-than-average performances: Seattle, Washington, D.C., San Francisco, Oakland, San Jose, Los Angeles, Orange County, New York City and Miami. The small number of new leases being transacted makes it tricky to estimate how much rents will fall, but RREEF suggested that the most common range for declines will be 5 to 10 percent.

The forecast turned in no surprising recovery for 2009; still, it speculated that the decline in retail sales might come to a halt by the middle of the year, with the beginning of a modest improvement by the fourth quarter. “More solid gains will not likely occur until 2010 and a vigorous rebound will wait until 2011,” the forecast stated. “Until then, the discounters and wholesale clubs should continue to outperform the sector.”

When the turnaround finally arrives, the luxury goods market will be among the first to recover. Discretionary retailers catering to the middle and lower-middle markets for electronics, apparel and mid-level department stores will follow. Bringing up the rear will be home-products stores, which RREEF Research projected are “likely to have the flattest bounce.”