Colliers International Retail Highlights Fall 2009
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C O L L I E R S I N T E R N AT I O N A L
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UNITED STATES
Highlights R E TA I L
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FALL
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2009
GDP Says Recession Over – Shoppers Say Otherwise Ross J. Moore | Executive Vice President, Market and Economic Research Garrick H. S. Brown | National Retail Research Director
MARKET INDICATORS Fall 2009
Spring 2010*
VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected, relative to prior period
USA RETAIL MARKET SUMMARY STATISTICS THIRD QUARTER 2009 Vacancy Rate Q3 2009: 10.57% Change from Q4 2008: 0.87%
While the latest GDP results were encouraging, the U.S. retail landscape remains one of the most challenging many can remember. Retail landlords and investors are fearful of losing tenants and have virtually no ability to dictate terms or pricing. Dominant regional malls and grocery anchored strip centers continue to be the strongest performers with power centers, outlet centers and lifestyle centers at the other end of the spectrum. Any retail tied to future residential development is most at risk. Commodity retail space is very challenging at the present time. According to the latest GDP numbers, the U.S. economy registered a 3.5 percent growth rate during the third quarter of this year. These numbers alone mean that the recession is technically over. At the same time, the stock market has been positively bullish compared to recent levels. Seven months ago, the Dow Jones index reflected two-thirds of today’s value as it hit 6,470. After rallying above 10,000 in mid-October, the index continues to hover near that level. Yet, with all of this good news, consumer confidence has been sputtering. An October 28 Wall Street Journal/NBC News poll found that 58 percent of the public believes that the recession is not over. This number is actually up from the 52 percent mark that the same poll found in September. Despite the good economic news, to the average U.S. consumer, the recession doesn’t feel anything close to being done. Unfortunately, the U.S. consumer may have a point. While we welcome news of positive growth in the third quarter, the fact is that the numbers are not quite as impressive beneath the surface. Much of the current surge in GDP is directly attributable to the impact of stimulus programs. “Cash for Clunkers” alone contributed over 1.6 percentage points to the
Absorption YTD Q3 2009: –18.5 Million Square Feet
8
Currently Under Construction: 9.5 Million Square Feet Asking Rents Per Square Foot Shopping Center Space: $17.38 Change from Q4 2008: -4.97%
Annual GDP Growth Rate (%)
New Construction YTD Q3 2009: 19.0 Million Square Feet Completed
continued on page 3
U.S. GROSS DOMESTIC PRODUCT GROWTH, 2005–2009
6 4 2 0 -2 -4 -6 -8 2005
2006
2007
2008
2009
Source: U.S. Dept. of Commerce Bureau of Economic Analysis
www.colliers.com Copyright © 2009 Colliers International. Colliers International is a worldwide affiliation of independently owned and operated companies.
COLLIERS INTERNATIONAL
1
UNITED STATES OF AMERICA
MARKET Atlanta, GA
RETAIL SURVEY
FALL 2009
EXISTING NEW SUPPLY NEW SUPPLY UNDER ABSORPTION ABSORPTION VACANCY VACANCY QUOTED RENT CHG. IN INVENTORY* (SF) 2008 YTD 2009 CONSTRUCTION 2008 YTD 2009 RATE (%) RATE (%) SEP. 30, 2009 RENT YTD SEP. 30, 2009 (SF) (SF) (SF) (SF) (SF) DEC. 31, 2008 SEP. 30, 2009 (US$ PSF) 2009 (%) 137,700,000
3,091,000
1,457,000
392,000
33,000
(1,748,000)
12.4
14.5
14.85
(3.88)
Baltimore, MD
46,405,000
213,000
618,000
14,000
(16,000)
(471,000)
6.6
8.7
18.72
(6.63)
Boston, MA
84,731,000
1,007,000
465,000
679,000
771,000
(237,000)
7.6
8.2
16.05
(5.64)
Charlotte, NC
25,464,000
430,000
897,000
53,000
73,000
422,000
9.1
11.2
14.48
(10.29)
Chicago, IL
164,591,000
3,464,000
976,000
416,000
1,783,000
(650,000)
10.9
11.5
17.03
(0.76)
Cincinnati, OH
32,597,000
246,000
51,000
44,000
700,000
(235,000)
11.4
12.5
11.99
(3.38)
Cleveland, OH
50,288,000
415,000
162,000
454,000
79,000
(415,000)
11.8
11.8
12.02
(3.45)
Columbus, OH
28,172,000
758,000
230,000
346,000
428,000
217,000
15.5
15.8
11.95
(1.81)
150,963,000
2,801,000
1,229,000
1,224,000
2,738,000
222,000
13.2
13.2
14.06
(1.33)
Denver, CO
65,733,000
376,000
192,000
13,000
104,000
(351,000)
10.5
11.2
15.48
(3.13)
Detroit, MI
70,005,000
522,000
460,000
441,000
21,000
35,000
14.2
15.1
13.40
(3.74)
Greenville/Spartanburg, SC
28,866,000
128,000
20,000
0
180,000
(389,000)
10.5
12.1
10.10
(3.35)
Hartford, CT
41,708,000
378,000
531,000
42,000
66,000
213,000
8.1
8.9
14.12
(0.49)
Houston, TX
Dallas/Ft. Worth, TX
142,161,000
2,451,000
1,010,000
222,000
613,000
1,073,000
12.9
12.9
14.82
(2.37)
Indianapolis, IN
36,918,000
215,000
153,000
12,000
110,000
(194,000)
13.7
14.0
12.20
(4.69)
Jacksonville, FL
34,946,000
859,000
262,000
205,000
(366,000)
(647,000)
10.3
12.3
15.14
(7.29)
Kansas City, MO-KS
39,227,000
413,000
189,000
99,000
(99,000)
241,000
12.7
12.9
12.92
(2.64)
Las Vegas, NV
50,657,000
2,256,000
522,000
76,000
302,000
(457,000)
11.4
13.4
21.52
(12.77)
Los Angeles – Inland Empire, CA
82,790,000
3,387,000
962,000
360,000
1,017,000
(1,295,000)
9.6
11.6
21.27
(0.61)
144,143,000
1,464,000
1,088,000
438,000
(1,055,000)
(1,086,000)
5.2
6.4
24.60
(8.24)
Memphis, TN
29,923,000
773,000
19,000
78,000
544,000
150,000
13.6
12.7
11.35
(4.62)
Miami/Dade County, FL
43,358,000
2,137,000
292,000
245,000
1,177,000
(559,000)
5.5
7.0
24.48
(10.10)
Milwaukee, WI
34,257,000
792,000
48,000
31,000
750,000
(100,000)
11.4
11.2
12.77
(7.40)
Minneapolis, MN
53,483,000
418,000
11,000
0
(155,000)
(261,000)
9.9
10.0
13.73
(6.15)
Nashville, TN
29,444,000
581,000
369,000
242,000
429,000
(94,000)
9.0
10.9
15.01
(2.41)
New Jersey - Northern
92,461,000
0
140,000
146,000
367,000
(917,000)
7.2
8.0
20.57
0.73
Oakland/East Bay, CA
41,671,000
292,000
25,000
111,000
53,000
(696,000)
5.9
7.4
26.95
(3.96)
Orange County, CA
59,914,000
292,000
77,000
193,000
(421,000)
(909,000)
4.4
6.1
25.52
(6.90)
Orlando, FL
61,253,000
1,724,000
788,000
226,000
702,000
(1,116,000)
8.6
11.6
16.59
(3.32)
Los Angeles, CA
Palm Beach County, FL
35,559,000
272,000
240,000
0
(166,000)
(409,000)
8.5
10.8
19.79
(4.03)
Philadelphia, PA
148,122,000
1,238,000
1,284,000
588,000
854,000
(1,378,000)
9.5
10.0
15.00
(0.07)
Phoenix, AZ
101,500,000
3,166,000
934,000
632,000
392,000
(1,300,000)
11.2
13.3
17.05
(8.28)
Portland, OR
33,809,000
844,000
69,000
0
428,000
(350,000)
7.1
8.4
18.66
(4.84)
Raleigh/Durham/Chapel Hill, NC
38,072,000
592,000
1,093,000
288,000
394,000
525,000
8.4
9.2
15.94
0.95
Sacramento, CA
49,786,000
362,000
170,000
262,000
(861,000)
(979,000)
10.7
13.0
20.31
(3.70)
San Diego, CA
56,300,000
161,000
204,000
77,000
(396,000)
(750,000)
5.4
7.1
23.00
(6.08)
San Francisco, CA
10,339,000
0
0
0
53,000
(167,000)
2.3
4.1
29.48
(6.05)
San Jose/South Bay, CA
30,391,000
150,000
8,000
25,000
(171,000)
(417,000)
4.4
5.6
27.57
(9.87)
Seattle/Puget Sound, WA
55,006,000
1,534,000
598,000
66,000
981,000
(507,000)
6.8
9.1
20.12
(6.03)
St. Louis, MO
49,392,000
293,000
201,000
7,000
199,000
(93,000)
11.9
12.4
12.37
(5.43)
Tampa/St Petersburg, FL
85,985,000
1,810,000
529,000
145,000
446,000
(1,155,000)
8.7
10.2
14.73
(6.77)
Washington, DC
79,768,000
1,407,000
432,000
605,000
118,000
(1,311,000)
5.7
7.8
22.27
(1.15)
2,677,861,000 43,712,000 19,007,000
9,499,000
13,198,000 (18,548,000)
9.70
10.57
17.38
(4.97)
USA TOTAL/AVERAGE
*Includes Community and Neighborhood Centers. Source: CoStar, Colliers Research
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COLLIERS INTERNATIONAL
180 160 140 120 100 80 60 40 2009
2007
2008
2005
2006
2003
2004
2001
2002
1999
2000
1997
1998
1995
1996
1993
1994
1991
1992
1989
1990
1987
1988
20 1985
Shrinking inventory levels also played a role in boosting GDP growth. The change in real private inventories alone added 0.94 percentage points to the third quarter, as private businesses decreased inventories by nearly $131 billion. In general, reduced inventories are a good thing; ideally they are reduced through strong sales growth. However, reductions due to fewer orders and production cutbacks are not a positive sign. Unfortunately, the latter is largely the case today. The bright side here is for future growth; once the orders start again—recent manufacturing numbers already indicate improved activity—manufacturers will have to quickly ramp up production as inventory is reduced. The bad news, however, is that this means that much of today’s “growth” is more attributable to the basic math of the GDP than to any real increase in business activity.
FALL 2009
CONSUMER CONFIDENCE SURVEY, 1985–2009
1986
jump, according to some economists. The first-time homebuyer tax credit is another stimulus program that is cited for propping up these statistics.
RETAIL SURVEY
Consumer Confidence Index (1985=100)
UNITED STATES OF AMERICA
Source: Conference Board, Oct. 2009
Unfortunately, the decreasing personal savings rate in the third quarter is not good news for retailers. It does not represent consumers returning to the mall. It just represents further deterioration in personal incomes—a condition that will continue to worsen until job creation begins again.
Despite these unknowns, a return to positive GDP growth should be celebrated as good news. While some may dismiss the numbers as artificially inflated by stimulus spending, that is what stimulus spending is supposed to do. Certainly questions remain as to where Consumer Confidence Retreats in October fourth quarter GDP numbers will fall. While there are a limited Though the Conference Board’s Consumer Confidence Index number of economists who believe that fourth quarter numbers (CCI) has rebounded since posting an all-time low of 25.3 in may be in the red once more, we doubt that will happen. The February of this year, it has floundered in recent months. The CCI consensus forecast is for annualized growth to be in the range of 2.0 dropped from 54.5 in August to 53.1 in September and fell further – 3.0%, which would mark the second consecutive quarter of modin October to 47.7. est growth. This will set the stage for a modest recovery in 2010; the only missing ingredient It seems clear that the brief upswing in the Consumer confidence waned is jobs, which will remain largely elusive for CCI that took place earlier this year came as yet again in October—not a much of the year. consumers recovered from the initial shock of last year’s economic collapse. Relief that good omen for the coming The most negative news in the recent data the worst had passed was slowly replaced with holiday shopping season. was the decrease of current-dollar personal nervousness about the challenges ahead, and Right now the true indicator income by $15.5 billion (about 0.5 percent) continued job losses reinforced that trend. during the third quarter. Also, disposable to predict when retail sales personal income dropped 3.4 percent, though The link between the CCI and actual consumwill improve is not the it had increased by 3.8 percent during the er spending is a loose one—there were actually consumer confidence index, second quarter. Even the personal savings rate a few months earlier this year in which the declined during the third quarter, from 5.0 to CCI was improving, yet consumer spending but unemployment numbers. 3.3 percent. levels were still heading downward. To dismiss the CCI would be foolhardy, however; while The personal savings rate is an indicator we have been watchthere may not be a causal relationship between the two, they are ing closely. As recently as the first quarter of 2008, this number intimately connected. Although there are certainly green shoots in stood at zero. As jobs began to disappear and fear took hold of the economy that should give reason for optimism, the CCI is not the American consumer, the savings rate shot up. Ultimately, currently one of them. We don’t see consumer confidence improva healthy savings rate has many long-term benefits for the ing significantly (and translating into stronger retail sales) until the economy. If consumers are less indebted and have more savings, job figures improve. they are in a better position to spend on a sustainable basis and to invest in the economy. A zero or negative savings rate, as seen It’s clear that the biggest challenge ahead in this recovery will be at the peak of the last cycle, is simply not sustainable. But the the employment picture. As this report went to press, the latest downside to the increased savings rate is that it is coming at a available statistics indicated a 10.2 percent national unemploytime when the economy needs every bit of help it can get. For ment rate in October. Though this number is expected to peak now, each dollar saved means one not spent, and more bad news shortly, all of these indicators paint an ominous picture for this for retailers. year’s holiday shopping season.
COLLIERS INTERNATIONAL
3
UNITED STATES OF AMERICA
YEAR-TO-DATE SALES ENDING SEPTEMBER
RETAIL SURVEY
2009
2008
ANNUAL CHANGE (%)
3,041,924
3,333,655
(8.8)
Motor Vehicle and Parts Dealers
531,762
634,603
(16.2)
Gasoline Stations
265,172
387,970
(31.7)
Food and Beverage Stores
436,913
436,866
0.0
Grocery Stores
391,385
392,866
(0.4)
Health and Personal Care Stores
187,432
182,035
3.0
Building Material and Garden Equipment Stores
219,849
250,260
(12.2)
General Merchandise Stores
420,608
423,882
(0.8)
Department Stores (excluding leased departments)
127,871
137,529
(7.0)
Clothing and Accessories Stores
144,310
153,381
(5.9)
Furniture, Home Furnishings, Electronics and Appliance Stores
139,866
157,720
(11.3)
Furniture and Home Furnishing Stores
68,818
78,865
(12.7)
Electronics and Appliance Stores
71,048
78,855
(9.9)
Sporting Goods, Hobby, Book and Music Stores
60,960
62,121
(1.9)
All Stores
Miscellaneous Store Retailers
83,248
87,526
(4.9)
Nonstore Retailers
207,397
216,791
(4.3)
Food Services and Drinking Places
344,407
340,629
1.1
Source: US Census Bureau. All Values are expressed in millions of US dollars and are not seasonally adjusted.
Holiday Shopping Season Preview
The early October retail figures have been largely positive. The International Council of Shopping Centers (ICSC) estimates that October retail sales will show a 1 percent gain. Retail Metrics predicts a 2 percent increase. SpendingPulse, a division of MasterCard, reports that jewelry (7.2 percent) and clothing sales (3.4 percent) were both up in October. Still, concerns remain as to whether some of these increases are the result of pre-holiday season sales as more retailers have been offering deals to get consumers back in their stores. Accounting/consulting group BDO Seidman recently surveyed the Chief Marketing Officers (CMOs) of the top 100 U.S. retailers and found that they expect holiday sales to increase by 2.6 percent this year. Virtually all of the CMOs surveyed reported that they planned to offer more discounts and promotions this year. Despite the optimism of this poll, significant questions remain as to whether retailers will be able to improve upon last year’s dismal numbers. The National Retail Federation (NRF) is forecasting a 1 percent drop in holiday season spending this year. Last year, sales fell by 3.4 percent as the industry experienced its worst holiday shopping season in over 40 years. The NRF recently released its annual Holiday Consumer Intentions and Actions Survey, which found that consumers plan to spend an average of $683 on their holiday shopping this year. This number
4
COLLIERS INTERNATIONAL
FALL 2009
is down 3.2% from last year, and a dismal 16.2% decrease from 2007. We are not ready to write off the U.S. consumer this year. We cannot rule out that consumers may be ready to splurge a little. But we also can’t ignore floundering consumer confidence and ongoing declines in personal and disposable income. Beyond these, there are a few other reasons for concern. Retailers have also been slashing their inventories over the past year and will enter this holiday shopping season with fewer goods on-hand. This poses a serious challenge to retail buyers who have little room for error in judging which items might become hot at the last minute. This could potentially translate into lost sales. Also, most large U.S. retailers plan on expanding discounts and promotions this year. We are already in the midst of a massive price war on books (Walmart, Target and Amazon are all offering hardcover bestsellers as low as $9.98). Pricing wars for consumer electronics and toys are also in the works. For example, Toys “R” Us and a number of other major retailers are increasing their selection of toys priced at $10 or less, while stocking fewer high-end items. All of this will likely translate into more retail transactions, but also lower sales tickets.
Our outlook for the holiday shopping season is for retail sales to remain very near last year’s levels. The wildcard remains consumer fatigue, but even if U.S. shoppers splurge a bit this year, it will result in a minimal increase.
Shift To Thrift
With consumers pinched, it is not hard to understand the shift to thrift that has taken place with the U.S. consumer. If you want to know which retailers are doing well, the story is the same across all segments of the industry. Retailers that focus on necessities and offer low price-points are faring best. Luxury retailers, department stores, high-end apparel and upscale restaurants are doing the worst. Grocery stores, particularly those with competitive price points, have benefited, while restaurants have suffered. High-end beauty salons have struggled, while budget providers like Supercuts are expanding. The consumer’s shift to thrift is what is driving real estate strategy for many players. For example, Nordstrom, which continues to record negative same-store sales from its department stores, is shifting its expansion focus to its off-price Nordstrom Rack stores, which have seen positive same-store comps. TJ Maxx and Ross stores are also expanding as their numbers climb. Warehouse stores like Costco, Sam’s Club and BJ’s continue to look for sites, capitalizing not just on stronger sales performance
UNITED STATES OF AMERICA
RETAIL SURVEY
kiosk video rental business and recently completed a deal with TiVo to provide streaming video rentals through the TiVo console. But the future is bleak for its storefronts. The chain is in the process of closing as many as 960 stores through next year—a move that will bring as much as 4.8 million square feet of retail space back to the market. Blockbuster’s competitors are in the same situation; Movie Gallery has closed nearly 300 stores since September and will shutter another 150 before the end of the year.
Annual Percentage Change (%)
RETAIL SALES, LESS AUTOS AND PARTS
10 8 6 4 2 0 -2 -4 -6 -8 -10
2001
2002
2003
FALL 2009
2004
2005
2006
2007
2008
Source: U.S. Census Bureau
than their competitors, but a marketplace that has space users firmly in command. Meanwhile, dollar stores and thrift stores are exploding. Dollar General alone is on target to open 450 stores by the end of this year, with another 500 stores on tap for 2010. The grocery segment continues to expand as well, but it is coming in all shapes and sizes, as well as from new sources. With grocery sales holding their own, a number of retailers are looking to get a piece of the pie. Target is expanding its grocery sections in over 100 existing stores, and will feature grocery components in nearly all of its planned new stores. Walmart continues to grow, and while its 200,000 square foot Supercenter format is at the forefront of expansion, the world’s largest retailer is also dabbling in smaller footprints to provide more flexibility. The same goes for the Midwestern superstore chain Meijer. While its stores typically run 200,000 square feet, the chain is pushing into the Chicago market with a number of 100,000 square foot sites. Meanwhile, Southeast chain Publix has plans for as many as 50 stores next year. Two of Publix’s biggest competitors, Food Lion and Winn-Dixie, also have a number of new stores planned for the Southeast in 2010. Small-format grocery and convenience stores are also on the rise. Tesco, after initially sputtering with the launch of its 15,000 square foot Fresh & Easy concept, is gearing up to open as many as 50 new stores throughout northern California and Nevada in the coming year. Meanwhile, convenience store giant 7-Eleven has plans to open as many as 200 new stores annually over the next three years. Regional convenience store operators like Sheetz, Casey’s and Circle K all have new stores in the works. Even the large grocery chains are moving forward with their own convenience store/gas station concepts. The players with the greatest expansion plans in 2010 include Giant Supermarkets’ Giant to Go, Giant Eagles’s GetGo and Publix’ Pix. There are still some retailers growing in this economy, though the industry on the whole remains in contraction mode. In some cases, this is more due to evolving technology trends than to the recession. Traditional music stores no longer exist outside of a handful of independents. Video rental stores are the next to go. Industry leader Blockbuster has been making moves to prepare itself for a post-storefront world. The chain is expanding into the
If there is good news, it is that the rate at which retailers were closing their stores actually has slowed in 2009 compared to 2008. The bad news is that the retail industry continues to contract, and we expect a surge of retail closures in early 2010. 2009
Retail Vacancy Survey
Nearly every major U.S. market has experienced increased vacancy in 2009. Of the 42 major U.S. markets surveyed by Colliers, 15 now have vacancy rates of 12 percent or higher, up from eight markets in the fourth quarter of 2008. Detroit tops the list, with current vacancy at 15.1 percent. Most Midwest markets have strugThe sharpest vacancy gled as local economies have slowed down: Cincinnati, increases have been in Columbus, Indianapolis, former boomtowns. Kansas City and St. Louis all have vacancies above the 12 These areas were left percent mark.
with the worst residential
The sharpest vacancy property value declines, increases have been in forthe greatest surges in mer boomtowns—mostly in the Western U.S. In places unemployment, and like Las Vegas, Phoenix and California’s Central Valley, overbuilt retail markets. booming housing markets were feeding massive retail growth just a few years ago. Once the market collapsed, these areas were left with the highest residential foreclosure rates, the worst residential property value declines and the greatest surges in unemployment as once vibrant construction sectors went belly up. Retail markets were overbuilt as well, pushing retail vacancy in Las Vegas, Phoenix and Sacramento over the 12 percent mark. This trend has played out to a lesser degree in a number of Sunbelt markets where—at the peak of the last cycle—population growth was on the upswing and local new home construction levels were up, but not quite at the free-for-all levels that were recorded in places like Las Vegas. The Atlanta, Greenville/ Spartanburg, Jacksonville and Memphis markets have all seen vacancy top 12 percent. In some cases, like Atlanta, a deep retail construction pipeline (nearly 1.5 million in deliveries this year) has continued to deliver product to the market, further exacerbating vacancy issues. COLLIERS INTERNATIONAL
5
UNITED STATES OF AMERICA
Prices for retail land have plummeted. Even the healthiest markets have seen pricing drop by at least 25% on average, with pricing declines of as much as 75% in some trade areas. Despite this decline, developers may reduce activity to buying and holding land for future projects. Very few projects will be brought to market over the next two years and new retail development will be rare. The only exceptions to this will be a small number of urban mixed-use development with retail components and centers that have major pre-leasing commitments in place prior to breaking ground.
Number of Large Center Openings
16
12 10 8
14 11
10
10 8
7
6
7 5
4
3
2
2
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* Source: ICSC, Colliers Research
*Projected
Occupancy Growth/Absorption Trends
Of the 42 major markets Colliers tracks, only nine have posted positive occupancy growth this year. The Charlotte market recorded over 420,000 square feet of growth through the third quarter of this year. New construction there, however, added nearly 900,000 square feet of new product, and much of the occupancy growth was from tenants taking space in these new projects based upon earlier deals. This same trend played out in Columbus, Detroit, Hartford and Raleigh/Durham/Chapel Hill: all recorded occupancy growth, but at levels that did not keep up with deliveries so vacancy ticked upward in all of these markets. Memphis was the only market in our survey to record both net absorption and reduced vacancy levels. The Dallas/Fort Worth market, for example, recorded over 220,000 square feet of occupancy growth, but new construction added over 1.2 million square feet of inventory. The Houston market, meanwhile, has seen deliveries and occupancy growth come close to equilibrium with both deliveries and absorption coming in at just over one million square feet. The good news is that the Texas economy has fared better than most and is expected to lead the U.S. out of recession. Many retailers, while pulling back from expansion altogether, continue to look for sites in the Lone Star State. Despite the fact that both Dallas and Houston have current vacancy levels above 12 percent, these markets should perform better than most in terms of net absorption in the coming year.
Rental Rate Trends – Once in a Generation Tenant’s Market
Virtually every market recorded rental rate erosion over the past year. In many cases, declines in asking rents were substantial. On the whole, asking rents have dropped about 5 percent over the past year. In most markets the actual declines have been closer to 10 percent, while some have fallen as much as 20 percent. Just as landlords have been battered on the few new leases they are signing, mid-term rental rate reductions are now the norm. Virtually every major retail chain has actively been seeking reduced rents on existing leases from their landlords and most have been successful. This trend started with struggling mom-and-pop retailers for whom rent reduction was often a matter of survival. It spread to national credit tenants with underperforming locations who were ready to pull the plug unless landlords agreed to concessions. Increasing vacancy and falling asking rents only accelerated the trend. Now it has become an opportunistic play for retailers in all sectors. Even landlords who had not moved on rents are now finding it difficult to stay that course. The problem is worse for landlords facing pending lease expirations who will have to remain competitive in order to keep their best tenants. Much of the activity is a “flight to quality.” Tenants who held their own at Class B shopping centers are suddenly finding that they can upgrade to Class A shopping centers at similar rents. This is a once-in-a-generation tenant’s market. For those retailers looking for space, the options have never been more plentiful and the deals have never been better. S&P RETAIL INDEX (RLX), NOV. 2007–OCT. 2009
500 450
Retail Construction Levels at Lowest Point on Record
COLLIERS INTERNATIONAL
400 350 Index
As retailers close stores, most major U.S. markets find themselves with a surplus of retail space. Development levels have dropped precipitously. The Dallas/Fort Worth market leads all U.S. markets in terms of its development pipeline with over 1.2 million square feet of product under construction. This is a market that had averaged about seven million square feet of new construction annually since 1982. Only 12 of the markets in Colliers’ survey have more than 300,000 square feet of product in the development pipeline—
6
FALL 2009
more or less the equivalent of a standard size power center. Current retail development levels are at the lowest level that Colliers International has ever tracked.
LARGE RETAIL CENTER OPENINGS, 2000–2009
14
RETAIL SURVEY
300 250 200 150
Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct
2007
2008
2009
UNITED STATES OF AMERICA
RETAIL SURVEY
Looking Ahead
U.S. RETAIL REAL ESTATE INVESTMENT PERFORMANCE,1999–2009
We expect retail to contract for at least another two years. Until the employment picture brightens substantially, we will continue to see depressed retail sales. Likewise, even once unemployment starts to tick downward, it will be some time before the shift to thrift for consumers ends.
While the credit markets continue to slowly loosen up, access to capital remains challenging. The good news is that a few retailers who were on the edge of bankruptcy have recently been able to find financing to deal with debt coming due. The biggest example is Rite Aid, which was able to successfully refinance about $1.9 billion in debt earlier this year. The bad news is that there are more retailers who continue to struggle to raise cash to deal with looming maturities. Holiday sales will not provide needed relief. Many retailers are selling notes or pursuing other methods of recapitalization, but the reality is that there will be more failures ahead. Access to credit won’t just be a factor for national credit retailers. The recent announcement of CIT Group’s bankruptcy means that one of the major short-term credit resources to mom-and-pop retailers is likely going away. Unfortunately, the ongoing commercial real estate foreclosure crisis will only further exacerbate this problem. As much as $350 billion in commercial loans may go bad over the next three years. Though the market has yet to be flooded with distressed assets thanks to the “pretend & extend” approach that many banks are employing, the number of distressed properties on the market is set to increase over the next few years. The real problem here is that smaller regional and local banks face the greatest challenges ahead. Over 120 banks have failed since the beginning of this year; in recent weeks the rate of bank failure has averaged about five per week. At least 200 to 400 banks will fail over the next few years. Most will be local and regional players, whose bread and butter was commercial real estate loans and small business loans. With this segment of the banking industry struggling, small business loans may dry up. The mom-and-pop segment has already been impacted. At the peak of the last cycle, an average of one new retail start-up made up for every mom-and-pop venture that failed. At that time, home equity lines of credit were another option on the table for startups. Given what has happened to real estate values, home equity has disappeared as an initial line of funding for mom-and-pops. Now, on average, we see about one new mom-and-pop player for every
46.8
50
40.0
40 30.4
30 Annual Total Returns (%)
This year’s holiday shopping season will play a major role in determining activity for the coming months. Unfortunately, even in the best case scenario, sales will be weak. Though the number of retail store closures in 2009 has, so far, decreased from last year, we expect that there will be another round of store closures and retail bankruptcies early next year. One major mall anchor retailer has already put together contingency strategies for its retail real estate in 2010 that range from bankruptcy to an unexpectedly strong holiday season. In either case, the chain is likely to close a substantial number of big box stores.
FALL 2009
18.0
20 10
9.6
7.8
29.0 21.1 13.7
23.0 17.1
20.0 11.8 13.4
13.5
-11.6**
6.7
0 -10
-4.1 -10.1*
-11.8
-15.8
-20 Private Equity
-30
*YTD Q2 returns only **YTD Sep. returns only
-40 -50
Public Equity -48.4
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: National Council of Real Estate Investment Fiduciaries, National Association of Real Estate Investment Trusts
six small retailers that fail. This number will almost certainly worsen, meaning that the pool of tenants for landlords will continue to shrink over the next few years. While we have seen some forecasts that call for retail real estate to hit bottom in 2010, it may be too early to predict. Vacancy will continue to rise over the first half of next year, and the landscape for national credit retailers will begin to stabilize by the end of 2010. The picture for mom-and-pop retailers may not be positive. The good news is that a number of value-oriented chains will continue to be active in the marketplace and many of these will help to fill vacant box space. The market for inline retail space will also continue to see activity from a range of sources. Dollar stores are extremely active. Likewise, there will continue to be growth from franchise-driven concepts ranging from lower price-point restaurants to beauty salons. But we expect these gains to continue to be outpaced by retail closures for most, if not the entirety, of 2010.
GLOSSARY Community Shopping Center – Anchor tenant is typically a discount department store, supermarket or super drug store. Offers a wider range of apparel and other soft goods than a neighborhood center. Total gross leasable area between 100,000 and 400,000 SF. Neighborhood Shopping Center – Anchors are likely to be supermarkets or drugstores. Other tenants might include stores providing sundries, snacks and personal services. 30,000 – 150,000 SF in size and configured as strip centers without an enclosed walkway or mall area; may have a canopy to connect the storefronts. Power Center – Provide tremendous selection in a particular category at low prices. Anchors are likely to be category killers, home improvement stores, discount department stores, warehouse clubs or off-price stores. 250,000600,000 SF in size and configured with several freestanding anchors and a minimal number of small specialty tenants. Lifestyle Center – Non-anchored, open-air specialty center with high concentration of mall-type fashion, home, restaurant and entertainment retailers. Rents – All retail rents in this report are quoted on an annual, triple net per square foot basis. Note: SF = Square Feet
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
PSF = Per Square Foot
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UNITED STATES OF AMERICA
Colliers International is an affiliation of leading real estate firms committed to delivering consistently superior commercial real estate services, wherever and whenever needed.
RETAIL HIGHLIGHTS
FALL 2009
$1.6 Billion (€1.1 Billion) in Global Revenue 1. 1 Billion SF (102 Million SM) Under Management 12,700 Employees
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COLLIERS INTERNATIONAL
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UNITED STATES
Highlights R E TA I L
|
FALL
|
2009
GDP Says Recession Over – Shoppers Say Otherwise Ross J. Moore | Executive Vice President, Market and Economic Research Garrick H. S. Brown | National Retail Research Director
MARKET INDICATORS Fall 2009
Spring 2010*
VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected, relative to prior period
USA RETAIL MARKET SUMMARY STATISTICS THIRD QUARTER 2009 Vacancy Rate Q3 2009: 10.57% Change from Q4 2008: 0.87%
While the latest GDP results were encouraging, the U.S. retail landscape remains one of the most challenging many can remember. Retail landlords and investors are fearful of losing tenants and have virtually no ability to dictate terms or pricing. Dominant regional malls and grocery anchored strip centers continue to be the strongest performers with power centers, outlet centers and lifestyle centers at the other end of the spectrum. Any retail tied to future residential development is most at risk. Commodity retail space is very challenging at the present time. According to the latest GDP numbers, the U.S. economy registered a 3.5 percent growth rate during the third quarter of this year. These numbers alone mean that the recession is technically over. At the same time, the stock market has been positively bullish compared to recent levels. Seven months ago, the Dow Jones index reflected two-thirds of today’s value as it hit 6,470. After rallying above 10,000 in mid-October, the index continues to hover near that level. Yet, with all of this good news, consumer confidence has been sputtering. An October 28 Wall Street Journal/NBC News poll found that 58 percent of the public believes that the recession is not over. This number is actually up from the 52 percent mark that the same poll found in September. Despite the good economic news, to the average U.S. consumer, the recession doesn’t feel anything close to being done. Unfortunately, the U.S. consumer may have a point. While we welcome news of positive growth in the third quarter, the fact is that the numbers are not quite as impressive beneath the surface. Much of the current surge in GDP is directly attributable to the impact of stimulus programs. “Cash for Clunkers” alone contributed over 1.6 percentage points to the
Absorption YTD Q3 2009: –18.5 Million Square Feet
8
Currently Under Construction: 9.5 Million Square Feet Asking Rents Per Square Foot Shopping Center Space: $17.38 Change from Q4 2008: -4.97%
Annual GDP Growth Rate (%)
New Construction YTD Q3 2009: 19.0 Million Square Feet Completed
continued on page 3
U.S. GROSS DOMESTIC PRODUCT GROWTH, 2005–2009
6 4 2 0 -2 -4 -6 -8 2005
2006
2007
2008
2009
Source: U.S. Dept. of Commerce Bureau of Economic Analysis
www.colliers.com Copyright © 2009 Colliers International. Colliers International is a worldwide affiliation of independently owned and operated companies.
COLLIERS INTERNATIONAL
1
UNITED STATES OF AMERICA
MARKET Atlanta, GA
RETAIL SURVEY
FALL 2009
EXISTING NEW SUPPLY NEW SUPPLY UNDER ABSORPTION ABSORPTION VACANCY VACANCY QUOTED RENT CHG. IN INVENTORY* (SF) 2008 YTD 2009 CONSTRUCTION 2008 YTD 2009 RATE (%) RATE (%) SEP. 30, 2009 RENT YTD SEP. 30, 2009 (SF) (SF) (SF) (SF) (SF) DEC. 31, 2008 SEP. 30, 2009 (US$ PSF) 2009 (%) 137,700,000
3,091,000
1,457,000
392,000
33,000
(1,748,000)
12.4
14.5
14.85
(3.88)
Baltimore, MD
46,405,000
213,000
618,000
14,000
(16,000)
(471,000)
6.6
8.7
18.72
(6.63)
Boston, MA
84,731,000
1,007,000
465,000
679,000
771,000
(237,000)
7.6
8.2
16.05
(5.64)
Charlotte, NC
25,464,000
430,000
897,000
53,000
73,000
422,000
9.1
11.2
14.48
(10.29)
Chicago, IL
164,591,000
3,464,000
976,000
416,000
1,783,000
(650,000)
10.9
11.5
17.03
(0.76)
Cincinnati, OH
32,597,000
246,000
51,000
44,000
700,000
(235,000)
11.4
12.5
11.99
(3.38)
Cleveland, OH
50,288,000
415,000
162,000
454,000
79,000
(415,000)
11.8
11.8
12.02
(3.45)
Columbus, OH
28,172,000
758,000
230,000
346,000
428,000
217,000
15.5
15.8
11.95
(1.81)
150,963,000
2,801,000
1,229,000
1,224,000
2,738,000
222,000
13.2
13.2
14.06
(1.33)
Denver, CO
65,733,000
376,000
192,000
13,000
104,000
(351,000)
10.5
11.2
15.48
(3.13)
Detroit, MI
70,005,000
522,000
460,000
441,000
21,000
35,000
14.2
15.1
13.40
(3.74)
Greenville/Spartanburg, SC
28,866,000
128,000
20,000
0
180,000
(389,000)
10.5
12.1
10.10
(3.35)
Hartford, CT
41,708,000
378,000
531,000
42,000
66,000
213,000
8.1
8.9
14.12
(0.49)
Houston, TX
Dallas/Ft. Worth, TX
142,161,000
2,451,000
1,010,000
222,000
613,000
1,073,000
12.9
12.9
14.82
(2.37)
Indianapolis, IN
36,918,000
215,000
153,000
12,000
110,000
(194,000)
13.7
14.0
12.20
(4.69)
Jacksonville, FL
34,946,000
859,000
262,000
205,000
(366,000)
(647,000)
10.3
12.3
15.14
(7.29)
Kansas City, MO-KS
39,227,000
413,000
189,000
99,000
(99,000)
241,000
12.7
12.9
12.92
(2.64)
Las Vegas, NV
50,657,000
2,256,000
522,000
76,000
302,000
(457,000)
11.4
13.4
21.52
(12.77)
Los Angeles – Inland Empire, CA
82,790,000
3,387,000
962,000
360,000
1,017,000
(1,295,000)
9.6
11.6
21.27
(0.61)
144,143,000
1,464,000
1,088,000
438,000
(1,055,000)
(1,086,000)
5.2
6.4
24.60
(8.24)
Memphis, TN
29,923,000
773,000
19,000
78,000
544,000
150,000
13.6
12.7
11.35
(4.62)
Miami/Dade County, FL
43,358,000
2,137,000
292,000
245,000
1,177,000
(559,000)
5.5
7.0
24.48
(10.10)
Milwaukee, WI
34,257,000
792,000
48,000
31,000
750,000
(100,000)
11.4
11.2
12.77
(7.40)
Minneapolis, MN
53,483,000
418,000
11,000
0
(155,000)
(261,000)
9.9
10.0
13.73
(6.15)
Nashville, TN
29,444,000
581,000
369,000
242,000
429,000
(94,000)
9.0
10.9
15.01
(2.41)
New Jersey - Northern
92,461,000
0
140,000
146,000
367,000
(917,000)
7.2
8.0
20.57
0.73
Oakland/East Bay, CA
41,671,000
292,000
25,000
111,000
53,000
(696,000)
5.9
7.4
26.95
(3.96)
Orange County, CA
59,914,000
292,000
77,000
193,000
(421,000)
(909,000)
4.4
6.1
25.52
(6.90)
Orlando, FL
61,253,000
1,724,000
788,000
226,000
702,000
(1,116,000)
8.6
11.6
16.59
(3.32)
Los Angeles, CA
Palm Beach County, FL
35,559,000
272,000
240,000
0
(166,000)
(409,000)
8.5
10.8
19.79
(4.03)
Philadelphia, PA
148,122,000
1,238,000
1,284,000
588,000
854,000
(1,378,000)
9.5
10.0
15.00
(0.07)
Phoenix, AZ
101,500,000
3,166,000
934,000
632,000
392,000
(1,300,000)
11.2
13.3
17.05
(8.28)
Portland, OR
33,809,000
844,000
69,000
0
428,000
(350,000)
7.1
8.4
18.66
(4.84)
Raleigh/Durham/Chapel Hill, NC
38,072,000
592,000
1,093,000
288,000
394,000
525,000
8.4
9.2
15.94
0.95
Sacramento, CA
49,786,000
362,000
170,000
262,000
(861,000)
(979,000)
10.7
13.0
20.31
(3.70)
San Diego, CA
56,300,000
161,000
204,000
77,000
(396,000)
(750,000)
5.4
7.1
23.00
(6.08)
San Francisco, CA
10,339,000
0
0
0
53,000
(167,000)
2.3
4.1
29.48
(6.05)
San Jose/South Bay, CA
30,391,000
150,000
8,000
25,000
(171,000)
(417,000)
4.4
5.6
27.57
(9.87)
Seattle/Puget Sound, WA
55,006,000
1,534,000
598,000
66,000
981,000
(507,000)
6.8
9.1
20.12
(6.03)
St. Louis, MO
49,392,000
293,000
201,000
7,000
199,000
(93,000)
11.9
12.4
12.37
(5.43)
Tampa/St Petersburg, FL
85,985,000
1,810,000
529,000
145,000
446,000
(1,155,000)
8.7
10.2
14.73
(6.77)
Washington, DC
79,768,000
1,407,000
432,000
605,000
118,000
(1,311,000)
5.7
7.8
22.27
(1.15)
2,677,861,000 43,712,000 19,007,000
9,499,000
13,198,000 (18,548,000)
9.70
10.57
17.38
(4.97)
USA TOTAL/AVERAGE
*Includes Community and Neighborhood Centers. Source: CoStar, Colliers Research
2
COLLIERS INTERNATIONAL
180 160 140 120 100 80 60 40 2009
2007
2008
2005
2006
2003
2004
2001
2002
1999
2000
1997
1998
1995
1996
1993
1994
1991
1992
1989
1990
1987
1988
20 1985
Shrinking inventory levels also played a role in boosting GDP growth. The change in real private inventories alone added 0.94 percentage points to the third quarter, as private businesses decreased inventories by nearly $131 billion. In general, reduced inventories are a good thing; ideally they are reduced through strong sales growth. However, reductions due to fewer orders and production cutbacks are not a positive sign. Unfortunately, the latter is largely the case today. The bright side here is for future growth; once the orders start again—recent manufacturing numbers already indicate improved activity—manufacturers will have to quickly ramp up production as inventory is reduced. The bad news, however, is that this means that much of today’s “growth” is more attributable to the basic math of the GDP than to any real increase in business activity.
FALL 2009
CONSUMER CONFIDENCE SURVEY, 1985–2009
1986
jump, according to some economists. The first-time homebuyer tax credit is another stimulus program that is cited for propping up these statistics.
RETAIL SURVEY
Consumer Confidence Index (1985=100)
UNITED STATES OF AMERICA
Source: Conference Board, Oct. 2009
Unfortunately, the decreasing personal savings rate in the third quarter is not good news for retailers. It does not represent consumers returning to the mall. It just represents further deterioration in personal incomes—a condition that will continue to worsen until job creation begins again.
Despite these unknowns, a return to positive GDP growth should be celebrated as good news. While some may dismiss the numbers as artificially inflated by stimulus spending, that is what stimulus spending is supposed to do. Certainly questions remain as to where Consumer Confidence Retreats in October fourth quarter GDP numbers will fall. While there are a limited Though the Conference Board’s Consumer Confidence Index number of economists who believe that fourth quarter numbers (CCI) has rebounded since posting an all-time low of 25.3 in may be in the red once more, we doubt that will happen. The February of this year, it has floundered in recent months. The CCI consensus forecast is for annualized growth to be in the range of 2.0 dropped from 54.5 in August to 53.1 in September and fell further – 3.0%, which would mark the second consecutive quarter of modin October to 47.7. est growth. This will set the stage for a modest recovery in 2010; the only missing ingredient It seems clear that the brief upswing in the Consumer confidence waned is jobs, which will remain largely elusive for CCI that took place earlier this year came as yet again in October—not a much of the year. consumers recovered from the initial shock of last year’s economic collapse. Relief that good omen for the coming The most negative news in the recent data the worst had passed was slowly replaced with holiday shopping season. was the decrease of current-dollar personal nervousness about the challenges ahead, and Right now the true indicator income by $15.5 billion (about 0.5 percent) continued job losses reinforced that trend. during the third quarter. Also, disposable to predict when retail sales personal income dropped 3.4 percent, though The link between the CCI and actual consumwill improve is not the it had increased by 3.8 percent during the er spending is a loose one—there were actually consumer confidence index, second quarter. Even the personal savings rate a few months earlier this year in which the declined during the third quarter, from 5.0 to CCI was improving, yet consumer spending but unemployment numbers. 3.3 percent. levels were still heading downward. To dismiss the CCI would be foolhardy, however; while The personal savings rate is an indicator we have been watchthere may not be a causal relationship between the two, they are ing closely. As recently as the first quarter of 2008, this number intimately connected. Although there are certainly green shoots in stood at zero. As jobs began to disappear and fear took hold of the economy that should give reason for optimism, the CCI is not the American consumer, the savings rate shot up. Ultimately, currently one of them. We don’t see consumer confidence improva healthy savings rate has many long-term benefits for the ing significantly (and translating into stronger retail sales) until the economy. If consumers are less indebted and have more savings, job figures improve. they are in a better position to spend on a sustainable basis and to invest in the economy. A zero or negative savings rate, as seen It’s clear that the biggest challenge ahead in this recovery will be at the peak of the last cycle, is simply not sustainable. But the the employment picture. As this report went to press, the latest downside to the increased savings rate is that it is coming at a available statistics indicated a 10.2 percent national unemploytime when the economy needs every bit of help it can get. For ment rate in October. Though this number is expected to peak now, each dollar saved means one not spent, and more bad news shortly, all of these indicators paint an ominous picture for this for retailers. year’s holiday shopping season.
COLLIERS INTERNATIONAL
3
UNITED STATES OF AMERICA
YEAR-TO-DATE SALES ENDING SEPTEMBER
RETAIL SURVEY
2009
2008
ANNUAL CHANGE (%)
3,041,924
3,333,655
(8.8)
Motor Vehicle and Parts Dealers
531,762
634,603
(16.2)
Gasoline Stations
265,172
387,970
(31.7)
Food and Beverage Stores
436,913
436,866
0.0
Grocery Stores
391,385
392,866
(0.4)
Health and Personal Care Stores
187,432
182,035
3.0
Building Material and Garden Equipment Stores
219,849
250,260
(12.2)
General Merchandise Stores
420,608
423,882
(0.8)
Department Stores (excluding leased departments)
127,871
137,529
(7.0)
Clothing and Accessories Stores
144,310
153,381
(5.9)
Furniture, Home Furnishings, Electronics and Appliance Stores
139,866
157,720
(11.3)
Furniture and Home Furnishing Stores
68,818
78,865
(12.7)
Electronics and Appliance Stores
71,048
78,855
(9.9)
Sporting Goods, Hobby, Book and Music Stores
60,960
62,121
(1.9)
All Stores
Miscellaneous Store Retailers
83,248
87,526
(4.9)
Nonstore Retailers
207,397
216,791
(4.3)
Food Services and Drinking Places
344,407
340,629
1.1
Source: US Census Bureau. All Values are expressed in millions of US dollars and are not seasonally adjusted.
Holiday Shopping Season Preview
The early October retail figures have been largely positive. The International Council of Shopping Centers (ICSC) estimates that October retail sales will show a 1 percent gain. Retail Metrics predicts a 2 percent increase. SpendingPulse, a division of MasterCard, reports that jewelry (7.2 percent) and clothing sales (3.4 percent) were both up in October. Still, concerns remain as to whether some of these increases are the result of pre-holiday season sales as more retailers have been offering deals to get consumers back in their stores. Accounting/consulting group BDO Seidman recently surveyed the Chief Marketing Officers (CMOs) of the top 100 U.S. retailers and found that they expect holiday sales to increase by 2.6 percent this year. Virtually all of the CMOs surveyed reported that they planned to offer more discounts and promotions this year. Despite the optimism of this poll, significant questions remain as to whether retailers will be able to improve upon last year’s dismal numbers. The National Retail Federation (NRF) is forecasting a 1 percent drop in holiday season spending this year. Last year, sales fell by 3.4 percent as the industry experienced its worst holiday shopping season in over 40 years. The NRF recently released its annual Holiday Consumer Intentions and Actions Survey, which found that consumers plan to spend an average of $683 on their holiday shopping this year. This number
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FALL 2009
is down 3.2% from last year, and a dismal 16.2% decrease from 2007. We are not ready to write off the U.S. consumer this year. We cannot rule out that consumers may be ready to splurge a little. But we also can’t ignore floundering consumer confidence and ongoing declines in personal and disposable income. Beyond these, there are a few other reasons for concern. Retailers have also been slashing their inventories over the past year and will enter this holiday shopping season with fewer goods on-hand. This poses a serious challenge to retail buyers who have little room for error in judging which items might become hot at the last minute. This could potentially translate into lost sales. Also, most large U.S. retailers plan on expanding discounts and promotions this year. We are already in the midst of a massive price war on books (Walmart, Target and Amazon are all offering hardcover bestsellers as low as $9.98). Pricing wars for consumer electronics and toys are also in the works. For example, Toys “R” Us and a number of other major retailers are increasing their selection of toys priced at $10 or less, while stocking fewer high-end items. All of this will likely translate into more retail transactions, but also lower sales tickets.
Our outlook for the holiday shopping season is for retail sales to remain very near last year’s levels. The wildcard remains consumer fatigue, but even if U.S. shoppers splurge a bit this year, it will result in a minimal increase.
Shift To Thrift
With consumers pinched, it is not hard to understand the shift to thrift that has taken place with the U.S. consumer. If you want to know which retailers are doing well, the story is the same across all segments of the industry. Retailers that focus on necessities and offer low price-points are faring best. Luxury retailers, department stores, high-end apparel and upscale restaurants are doing the worst. Grocery stores, particularly those with competitive price points, have benefited, while restaurants have suffered. High-end beauty salons have struggled, while budget providers like Supercuts are expanding. The consumer’s shift to thrift is what is driving real estate strategy for many players. For example, Nordstrom, which continues to record negative same-store sales from its department stores, is shifting its expansion focus to its off-price Nordstrom Rack stores, which have seen positive same-store comps. TJ Maxx and Ross stores are also expanding as their numbers climb. Warehouse stores like Costco, Sam’s Club and BJ’s continue to look for sites, capitalizing not just on stronger sales performance
UNITED STATES OF AMERICA
RETAIL SURVEY
kiosk video rental business and recently completed a deal with TiVo to provide streaming video rentals through the TiVo console. But the future is bleak for its storefronts. The chain is in the process of closing as many as 960 stores through next year—a move that will bring as much as 4.8 million square feet of retail space back to the market. Blockbuster’s competitors are in the same situation; Movie Gallery has closed nearly 300 stores since September and will shutter another 150 before the end of the year.
Annual Percentage Change (%)
RETAIL SALES, LESS AUTOS AND PARTS
10 8 6 4 2 0 -2 -4 -6 -8 -10
2001
2002
2003
FALL 2009
2004
2005
2006
2007
2008
Source: U.S. Census Bureau
than their competitors, but a marketplace that has space users firmly in command. Meanwhile, dollar stores and thrift stores are exploding. Dollar General alone is on target to open 450 stores by the end of this year, with another 500 stores on tap for 2010. The grocery segment continues to expand as well, but it is coming in all shapes and sizes, as well as from new sources. With grocery sales holding their own, a number of retailers are looking to get a piece of the pie. Target is expanding its grocery sections in over 100 existing stores, and will feature grocery components in nearly all of its planned new stores. Walmart continues to grow, and while its 200,000 square foot Supercenter format is at the forefront of expansion, the world’s largest retailer is also dabbling in smaller footprints to provide more flexibility. The same goes for the Midwestern superstore chain Meijer. While its stores typically run 200,000 square feet, the chain is pushing into the Chicago market with a number of 100,000 square foot sites. Meanwhile, Southeast chain Publix has plans for as many as 50 stores next year. Two of Publix’s biggest competitors, Food Lion and Winn-Dixie, also have a number of new stores planned for the Southeast in 2010. Small-format grocery and convenience stores are also on the rise. Tesco, after initially sputtering with the launch of its 15,000 square foot Fresh & Easy concept, is gearing up to open as many as 50 new stores throughout northern California and Nevada in the coming year. Meanwhile, convenience store giant 7-Eleven has plans to open as many as 200 new stores annually over the next three years. Regional convenience store operators like Sheetz, Casey’s and Circle K all have new stores in the works. Even the large grocery chains are moving forward with their own convenience store/gas station concepts. The players with the greatest expansion plans in 2010 include Giant Supermarkets’ Giant to Go, Giant Eagles’s GetGo and Publix’ Pix. There are still some retailers growing in this economy, though the industry on the whole remains in contraction mode. In some cases, this is more due to evolving technology trends than to the recession. Traditional music stores no longer exist outside of a handful of independents. Video rental stores are the next to go. Industry leader Blockbuster has been making moves to prepare itself for a post-storefront world. The chain is expanding into the
If there is good news, it is that the rate at which retailers were closing their stores actually has slowed in 2009 compared to 2008. The bad news is that the retail industry continues to contract, and we expect a surge of retail closures in early 2010. 2009
Retail Vacancy Survey
Nearly every major U.S. market has experienced increased vacancy in 2009. Of the 42 major U.S. markets surveyed by Colliers, 15 now have vacancy rates of 12 percent or higher, up from eight markets in the fourth quarter of 2008. Detroit tops the list, with current vacancy at 15.1 percent. Most Midwest markets have strugThe sharpest vacancy gled as local economies have slowed down: Cincinnati, increases have been in Columbus, Indianapolis, former boomtowns. Kansas City and St. Louis all have vacancies above the 12 These areas were left percent mark.
with the worst residential
The sharpest vacancy property value declines, increases have been in forthe greatest surges in mer boomtowns—mostly in the Western U.S. In places unemployment, and like Las Vegas, Phoenix and California’s Central Valley, overbuilt retail markets. booming housing markets were feeding massive retail growth just a few years ago. Once the market collapsed, these areas were left with the highest residential foreclosure rates, the worst residential property value declines and the greatest surges in unemployment as once vibrant construction sectors went belly up. Retail markets were overbuilt as well, pushing retail vacancy in Las Vegas, Phoenix and Sacramento over the 12 percent mark. This trend has played out to a lesser degree in a number of Sunbelt markets where—at the peak of the last cycle—population growth was on the upswing and local new home construction levels were up, but not quite at the free-for-all levels that were recorded in places like Las Vegas. The Atlanta, Greenville/ Spartanburg, Jacksonville and Memphis markets have all seen vacancy top 12 percent. In some cases, like Atlanta, a deep retail construction pipeline (nearly 1.5 million in deliveries this year) has continued to deliver product to the market, further exacerbating vacancy issues. COLLIERS INTERNATIONAL
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UNITED STATES OF AMERICA
Prices for retail land have plummeted. Even the healthiest markets have seen pricing drop by at least 25% on average, with pricing declines of as much as 75% in some trade areas. Despite this decline, developers may reduce activity to buying and holding land for future projects. Very few projects will be brought to market over the next two years and new retail development will be rare. The only exceptions to this will be a small number of urban mixed-use development with retail components and centers that have major pre-leasing commitments in place prior to breaking ground.
Number of Large Center Openings
16
12 10 8
14 11
10
10 8
7
6
7 5
4
3
2
2
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* Source: ICSC, Colliers Research
*Projected
Occupancy Growth/Absorption Trends
Of the 42 major markets Colliers tracks, only nine have posted positive occupancy growth this year. The Charlotte market recorded over 420,000 square feet of growth through the third quarter of this year. New construction there, however, added nearly 900,000 square feet of new product, and much of the occupancy growth was from tenants taking space in these new projects based upon earlier deals. This same trend played out in Columbus, Detroit, Hartford and Raleigh/Durham/Chapel Hill: all recorded occupancy growth, but at levels that did not keep up with deliveries so vacancy ticked upward in all of these markets. Memphis was the only market in our survey to record both net absorption and reduced vacancy levels. The Dallas/Fort Worth market, for example, recorded over 220,000 square feet of occupancy growth, but new construction added over 1.2 million square feet of inventory. The Houston market, meanwhile, has seen deliveries and occupancy growth come close to equilibrium with both deliveries and absorption coming in at just over one million square feet. The good news is that the Texas economy has fared better than most and is expected to lead the U.S. out of recession. Many retailers, while pulling back from expansion altogether, continue to look for sites in the Lone Star State. Despite the fact that both Dallas and Houston have current vacancy levels above 12 percent, these markets should perform better than most in terms of net absorption in the coming year.
Rental Rate Trends – Once in a Generation Tenant’s Market
Virtually every market recorded rental rate erosion over the past year. In many cases, declines in asking rents were substantial. On the whole, asking rents have dropped about 5 percent over the past year. In most markets the actual declines have been closer to 10 percent, while some have fallen as much as 20 percent. Just as landlords have been battered on the few new leases they are signing, mid-term rental rate reductions are now the norm. Virtually every major retail chain has actively been seeking reduced rents on existing leases from their landlords and most have been successful. This trend started with struggling mom-and-pop retailers for whom rent reduction was often a matter of survival. It spread to national credit tenants with underperforming locations who were ready to pull the plug unless landlords agreed to concessions. Increasing vacancy and falling asking rents only accelerated the trend. Now it has become an opportunistic play for retailers in all sectors. Even landlords who had not moved on rents are now finding it difficult to stay that course. The problem is worse for landlords facing pending lease expirations who will have to remain competitive in order to keep their best tenants. Much of the activity is a “flight to quality.” Tenants who held their own at Class B shopping centers are suddenly finding that they can upgrade to Class A shopping centers at similar rents. This is a once-in-a-generation tenant’s market. For those retailers looking for space, the options have never been more plentiful and the deals have never been better. S&P RETAIL INDEX (RLX), NOV. 2007–OCT. 2009
500 450
Retail Construction Levels at Lowest Point on Record
COLLIERS INTERNATIONAL
400 350 Index
As retailers close stores, most major U.S. markets find themselves with a surplus of retail space. Development levels have dropped precipitously. The Dallas/Fort Worth market leads all U.S. markets in terms of its development pipeline with over 1.2 million square feet of product under construction. This is a market that had averaged about seven million square feet of new construction annually since 1982. Only 12 of the markets in Colliers’ survey have more than 300,000 square feet of product in the development pipeline—
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FALL 2009
more or less the equivalent of a standard size power center. Current retail development levels are at the lowest level that Colliers International has ever tracked.
LARGE RETAIL CENTER OPENINGS, 2000–2009
14
RETAIL SURVEY
300 250 200 150
Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct
2007
2008
2009
UNITED STATES OF AMERICA
RETAIL SURVEY
Looking Ahead
U.S. RETAIL REAL ESTATE INVESTMENT PERFORMANCE,1999–2009
We expect retail to contract for at least another two years. Until the employment picture brightens substantially, we will continue to see depressed retail sales. Likewise, even once unemployment starts to tick downward, it will be some time before the shift to thrift for consumers ends.
While the credit markets continue to slowly loosen up, access to capital remains challenging. The good news is that a few retailers who were on the edge of bankruptcy have recently been able to find financing to deal with debt coming due. The biggest example is Rite Aid, which was able to successfully refinance about $1.9 billion in debt earlier this year. The bad news is that there are more retailers who continue to struggle to raise cash to deal with looming maturities. Holiday sales will not provide needed relief. Many retailers are selling notes or pursuing other methods of recapitalization, but the reality is that there will be more failures ahead. Access to credit won’t just be a factor for national credit retailers. The recent announcement of CIT Group’s bankruptcy means that one of the major short-term credit resources to mom-and-pop retailers is likely going away. Unfortunately, the ongoing commercial real estate foreclosure crisis will only further exacerbate this problem. As much as $350 billion in commercial loans may go bad over the next three years. Though the market has yet to be flooded with distressed assets thanks to the “pretend & extend” approach that many banks are employing, the number of distressed properties on the market is set to increase over the next few years. The real problem here is that smaller regional and local banks face the greatest challenges ahead. Over 120 banks have failed since the beginning of this year; in recent weeks the rate of bank failure has averaged about five per week. At least 200 to 400 banks will fail over the next few years. Most will be local and regional players, whose bread and butter was commercial real estate loans and small business loans. With this segment of the banking industry struggling, small business loans may dry up. The mom-and-pop segment has already been impacted. At the peak of the last cycle, an average of one new retail start-up made up for every mom-and-pop venture that failed. At that time, home equity lines of credit were another option on the table for startups. Given what has happened to real estate values, home equity has disappeared as an initial line of funding for mom-and-pops. Now, on average, we see about one new mom-and-pop player for every
46.8
50
40.0
40 30.4
30 Annual Total Returns (%)
This year’s holiday shopping season will play a major role in determining activity for the coming months. Unfortunately, even in the best case scenario, sales will be weak. Though the number of retail store closures in 2009 has, so far, decreased from last year, we expect that there will be another round of store closures and retail bankruptcies early next year. One major mall anchor retailer has already put together contingency strategies for its retail real estate in 2010 that range from bankruptcy to an unexpectedly strong holiday season. In either case, the chain is likely to close a substantial number of big box stores.
FALL 2009
18.0
20 10
9.6
7.8
29.0 21.1 13.7
23.0 17.1
20.0 11.8 13.4
13.5
-11.6**
6.7
0 -10
-4.1 -10.1*
-11.8
-15.8
-20 Private Equity
-30
*YTD Q2 returns only **YTD Sep. returns only
-40 -50
Public Equity -48.4
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: National Council of Real Estate Investment Fiduciaries, National Association of Real Estate Investment Trusts
six small retailers that fail. This number will almost certainly worsen, meaning that the pool of tenants for landlords will continue to shrink over the next few years. While we have seen some forecasts that call for retail real estate to hit bottom in 2010, it may be too early to predict. Vacancy will continue to rise over the first half of next year, and the landscape for national credit retailers will begin to stabilize by the end of 2010. The picture for mom-and-pop retailers may not be positive. The good news is that a number of value-oriented chains will continue to be active in the marketplace and many of these will help to fill vacant box space. The market for inline retail space will also continue to see activity from a range of sources. Dollar stores are extremely active. Likewise, there will continue to be growth from franchise-driven concepts ranging from lower price-point restaurants to beauty salons. But we expect these gains to continue to be outpaced by retail closures for most, if not the entirety, of 2010.
GLOSSARY Community Shopping Center – Anchor tenant is typically a discount department store, supermarket or super drug store. Offers a wider range of apparel and other soft goods than a neighborhood center. Total gross leasable area between 100,000 and 400,000 SF. Neighborhood Shopping Center – Anchors are likely to be supermarkets or drugstores. Other tenants might include stores providing sundries, snacks and personal services. 30,000 – 150,000 SF in size and configured as strip centers without an enclosed walkway or mall area; may have a canopy to connect the storefronts. Power Center – Provide tremendous selection in a particular category at low prices. Anchors are likely to be category killers, home improvement stores, discount department stores, warehouse clubs or off-price stores. 250,000600,000 SF in size and configured with several freestanding anchors and a minimal number of small specialty tenants. Lifestyle Center – Non-anchored, open-air specialty center with high concentration of mall-type fashion, home, restaurant and entertainment retailers. Rents – All retail rents in this report are quoted on an annual, triple net per square foot basis. Note: SF = Square Feet
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
PSF = Per Square Foot
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Colliers International is an affiliation of leading real estate firms committed to delivering consistently superior commercial real estate services, wherever and whenever needed.
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